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parable of the sadhu

The Parable of the Sadhu Melissa W

The purpose of this assignment is to read The Parable of the Sadhu and compare the lessons to one’s ethical conduct in the workplace. During the comparison, one should identify ideas and images descriptive of how one should behave ethically in the workplace, who is easily stepped over on the way to the top, and the manner in which older workers are treated.

The Parable of the Sadhu is a story following a group of hiker’s trekking up the mountain to reach the summit (McCoy, 1983). They stumble upon an Indian Holy Man, a Sadhu, naked and barely alive in the snow (McCoy, 1983). Each member of differing hiking teams assisted the Sadhu with various items (McCoy, 1983). A few of the men clothed him, some transported him to a different, potentially better, environment, and one gave him food and drink (McCoy, 1983). Ultimately, the various people assisted him, but then left him while continuing the hike, not caring until later what the outcome of those actions on that day might mean (McCoy, 1983).

The story, full of imagery and descriptive words, one can almost see the beautiful icy scenery. There is unique irony in the story of the Mountaineers hiking up the mountain in comparison to hiking up the corporate ladder. One might even say it is impossible to do this climb in an ethical fashion (Integrity Consulting Services Ltd., 2014-2017). The men consistently gave to the Sadhu, but never really cared about the true betterment of the Sadhu (Integrity Consulting Services Ltd., 2014-2017). In the end, they left him on the mountain and it is unknown if he lives or dies (Integrity Consulting Services Ltd., 2014-2017).  It’s shallow for the Men to think they can throw wealth at the Man who had nothing, but still get to claim they have done right by him (Integrity Consulting Services Ltd., 2014-2017).

In the comparison to business, the Sadhu could be considered weak and therefore a risk to have around. Certainly, no one is feeling obligated to take full responsibility for him, rather, each Man gives a little, in order to proclaim they gave a lot (Integrity Consulting Services Ltd., 2014-2017). Also, how one responds to crisis demonstrates the ethical backbone one will have in the workplace. Hindsight is 20/20 and this is also true in this story as Bowen McCoy, ultimately, feels guilty about his ethical decision to leave the Sadhu on the Mountain while he continued his summit (McCoy, 1983). The right decisions are not always so clear (Integrity Consulting Services Ltd., 2014-2017).

To close, one can make numerous comparisons between personal ethics and group ethics in the corporate environment. The author of this essay has described the comparisons between the story and ethics in the workplace. Without clear direction, ethics go out the window and blame takes over (Integrity Consulting Services Ltd., 2014-2017). Since doing the right thing may vary when facing certain circumstances, it is almost guaranteed decisions one makes today, may not be the decision one makes tomorrow (Integrity Consulting Services Ltd., 2014-2017).


Integrity Consulting Services Ltd. (2014-2017). Ethic Prereading: The Parable of the Sadhu. Retrieved from

McCoy, B. (1983, September-October). The Parable of the Sadhu. Retrieved from

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which of the following statements is true about the glycocalyx

1.    The most important aspect of a good microscope is




the number of ocular lenses.

2.Select the statement(s) that accurately describe homeostasis.

The body has the ability to detect change, activate mechanisms that oppose it, and maintain relatively stable internal conditions.

The loss of homeostatic control can cause illness but cannot cause death.

Internal conditions are absolutely constant and must not fluctuate within a range.

The internal state of the body is best described as a dynamic equilibrium in which there is a certain set point and conditions fluctuate slightly around this point.

The first and fourth choices are correct.

3.    Which of the following statements is not true regarding inclusions?

Inclusions are not enclosed by a membrane.

nclusions have no functions that are necessary for cellular survival.

Inclusions can participate in ATP production in the cell.

Inclusions could be viruses or bacteria inside the cell.

None of the these is a false statement.

4.    Which of the following statements is true about the glycocalyx?

All animal cells have a glycocalyx.

Even between identical twins, the glycocalyx is chemically unique.

The glycocalyx helps one cell adhere to another.

All of these are true statements.

Only the first and third statements are true.

5.    Cells of all species have many fundamental similarities because of

spontaneous generation.


common ancestry.

the laws of randomness.

6.    What is the volume of a cuboidal cell that measures 5 µm on each side?

125 µm2

25 µm2

25 µm3

125 µm3

None of the choices is correct.

7.    In 1859 Louis Pasteur determined beyond all reasonable doubt that

cells arose from non-living matter.

cells only arose from other cells.

cells do not spontaneously generate.

All of the choices are correct.

Only the second and third choices are correct

8.    Dynamic equilibrium can be described as having a certain set point for a given variable where internal conditions remain constant at this point.



9.    Which of the following best distinguishes a Law from a Theory?

A law is a generalization about the predictive ways in which matter and energy behave, while a theory represents information that can be independently verified by any trained person.

A law is a generalization about the predictive ways in which matter and energy behave, while a theory is the result of inductive reasoning based on repeated, confirmed observations.

A law is the result of inductive reasoning based on repeated, confirmed observations while a theory is an explanatory statement or set of statements derived from facts and confirmed hypotheses.

A law is an explanatory statement or set of statements derived from facts and confirmed hypotheses while a theory is information that can be independently verified by any trained person.

10.  What is the surface area of a cuboidal cell that measures 5 µm on each side?

25 µm2

150 µm2

25 µm3

150 µm3

None of the choices are correct.

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american and japanese workers can each produce 4 cars a year

CHAPTER 3 Interdependence and the Gains from Trade

Consider your typical day. You wake up in the morning and pour yourself juice from oranges grown in Florida and coffee from beans grown in Brazil. Over breakfast, you watch a news program broadcast from New York on your television made in China. You get dressed in clothes made of cotton grown in Georgia and sewn in factories in Thailand. You drive to class in a car made of parts manufactured in more than a dozen countries around the world. Then you open up your economics textbook written by an author living in Massachusetts, published by a company located in Ohio, and printed on paper made from trees grown in Oregon.

   Every day, you rely on many people, most of whom you have never met, to provide you with the goods and services that you enjoy. Such interdependence is possible because people trade with one another. Those people providing you with goods and services are not acting out of generosity. Nor is some government agency directing them to satisfy your desires. Instead, people provide you and other consumers with the goods and services they produce because they get something in return.

   In subsequent chapters, we examine how an economy coordinates the activities of millions of people with varying tastes and abilities. As a starting point for this analysis, in this chapter we consider the reasons for economic interdependence. One of the Ten Principles of Economicshighlighted in Chapter 1 is that trade can make everyone better off. We now examine this principle more closely. What exactly do people gain when they trade with one another? Why do people choose to become interdependent?

   The answers to these questions are key to understanding the modern global economy. Most countries today import from abroad many of the goods and services they consume, and they export to foreign customers many of the goods and services they produce. The analysis in this chapter explains interdependence not only among individuals but also among nations. As we will see, the gains from trade are much the same whether you are buying a haircut from your local barber or a T-shirt made by a worker on the other side of the globe.

3-1 A Parable for the Modern Economy

To understand why people choose to depend on others for goods and services and how this choice improves their lives, let’s look at a simple economy. Imagine that there are two goods in the world: meat and potatoes. And there are two people in the world—a cattle rancher named Rose and a potato farmer named Frank—each of whom would like to eat both meat and potatoes.

   The gains from trade are most obvious if Rose can produce only meat and Frank can produce only potatoes. In one scenario, Frank and Rose could choose to have nothing to do with each other. But after several months of eating beef roasted, boiled, broiled, and grilled, Rose might decide that self-sufficiency is not all it’s cracked up to be. Frank, who has been eating potatoes mashed, fried, baked, and scalloped, would likely agree. It is easy to see that trade would allow them to enjoy greater variety: Each could then have a steak with a baked potato or a burger with fries.

   Although this scene illustrates most simply how everyone can benefit from trade, the gains would be similar if Frank and Rose were each capable of producing the other good, but only at great cost. Suppose, for example, that Rose is able to grow potatoes but her land is not very well suited for it. Similarly, suppose that Frank is able to raise cattle and produce meat but he is not very good at it. In this case, Frank and Rose can each benefit by specializing in what he or she does best and then trading with the other person.

   The gains from trade are less obvious, however, when one person is better at producing everygood. For example, suppose that Rose is better at raising cattle and better at growing potatoes than Frank. In this case, should Rose choose to remain self-sufficient? Or is there still reason for her to trade with Frank? To answer this question, we need to look more closely at the factors that affect such a decision.

3-1a Production Possibilities

Suppose that Frank and Rose each work 8 hours per day and can devote this time to growing potatoes, raising cattle, or a combination of the two. The table in  Figure 1  shows the amount of time each person requires to produce 1 ounce of each good. Frank can produce an ounce of potatoes in 15 minutes and an ounce of meat in 60 minutes. Rose, who is more productive in both activities, can produce an ounce of potatoes in 10 minutes and an ounce of meat in 20 minutes. The last two columns in the table show the amounts of meat or potatoes Frank and Rose can produce if they devote all 8 hours to producing only that good.

FIGURE 1 The Production Possibilities Frontier

Panel (a) shows the production opportunities available to Frank the farmer and Rose the rancher. Panel (b) shows the combinations of meat and potatoes that Frank can produce. Panel (c) shows the combinations of meat and potatoes that Rose can produce. Both production possibilities frontiers are derived assuming that Frank and Rose each work 8 hours per day. If there is no trade, each person’s production possibilities frontier is also his or her consumption possibilities frontier.

   Panel (b) of  Figure 1  illustrates the amounts of meat and potatoes that Frank can produce. If Frank devotes all 8 hours of his time to potatoes, he produces 32 ounces of potatoes (measured on the horizontal axis) and no meat. If he devotes all his time to meat, he produces 8 ounces of meat (measured on the vertical axis) and no potatoes. If Frank divides his time equally between the two activities, spending 4 hours on each, he produces 16 ounces of potatoes and 4 ounces of meat. The figure shows these three possible outcomes and all others in between.

   This graph is Frank’s production possibilities frontier. As we discussed in  Chapter 2 , a production possibilities frontier shows the various mixes of output that an economy can produce. It illustrates one of the Ten Principles of Economics in Chapter 1: People face trade-offs. Here Frank faces a trade-off between producing meat and producing potatoes.

   You may recall that the production possibilities frontier in  Chapter 2  was drawn bowed out. In that case, the rate at which society could trade one good for the other depended on the amounts that were being produced. Here, however, Frank’s technology for producing meat and potatoes (as summarized in Figure 1) allows him to switch between the two goods at a constant rate. Whenever Frank spends 1 hour less producing meat and 1 hour more producing potatoes, he reduces his output of meat by 1 ounce and raises his output of potatoes by 4 ounces—and this is true regardless of how much he is already producing. As a result, the production possibilities frontier is a straight line.

   Panel (c) of  Figure 1  shows the production possibilities frontier for Rose. If Rose devotes all 8 hours of her time to potatoes, she produces 48 ounces of potatoes and no meat. If she devotes all her time to meat, she produces 24 ounces of meat and no potatoes. If Rose divides her time equally, spending 4 hours on each activity, she produces 24 ounces of potatoes and 12 ounces of meat. Once again, the production possibilities frontier shows all the possible outcomes.

   If Frank and Rose choose to be self-sufficient rather than trade with each other, then each consumes exactly what he or she produces. In this case, the production possibilities frontier is also the consumption possibilities frontier. That is, without trade, Figure 1 shows the possible combinations of meat and potatoes that Frank and Rose can each produce and then consume.

   These production possibilities frontiers are useful in showing the trade-offs that Frank and Rose face, but they do not tell us what Frank and Rose will actually choose to do. To determine their choices, we need to know the tastes of Frank and Rose. Let’s suppose they choose the combinations identified by points A and B in Figure 1. Based on his production opportunities and food preferences, Frank decides to produce and consume 16 ounces of potatoes and 4 ounces of meat, while Rose decides to produce and consume 24 ounces of potatoes and 12 ounces of meat.

3-1b Specialization and Trade

After several years of eating combination B, Rose gets an idea and goes to talk to Frank:

· ROSE: Frank, my friend, have I got a deal for you! I know how to improve life for both of us. I think you should stop producing meat altogether and devote all your time to growing potatoes. According to my calculations, if you work 8 hours a day growing potatoes, you’ll produce 32 ounces of potatoes. If you give me 15 of those 32 ounces, I’ll give you 5 ounces of meat in return. In the end, you’ll get to eat 17 ounces of potatoes and 5 ounces of meat every day, instead of the 16 ounces of potatoes and 4 ounces of meat you now get. If you go along with my plan, you’ll have more of both foods. [To illustrate her point, Rose shows Frank panel (a) of Figure 2.]

· FRANK: (sounding skeptical) That seems like a good deal for me. But I don’t understand why you are offering it. If the deal is so good for me, it can’t be good for you too.

· ROSE: Oh, but it is! Suppose I spend 6 hours a day raising cattle and 2 hours growing potatoes. Then I can produce 18 ounces of meat and 12 ounces of potatoes. After I give you 5 ounces of my meat in exchange for 15 ounces of your potatoes, I’ll end up with 13 ounces of meat and 27 ounces of potatoes, instead of the 12 ounces of meat and 24 ounces of potatoes that I now get. So I will also consume more of both foods than I do now. [She points out panel (b) of  Figure 2 .]

· FRANK: I don’t know. . . . This sounds too good to be true.

· ROSE: It’s really not as complicated as it first seems. Here—I’ve summarized my proposal for you in a simple table. [Rose shows Frank a copy of the table at the bottom of Figure 2.]

· FRANK: (after pausing to study the table) These calculations seem correct, but I am puzzled. How can this deal make us both better off?

· ROSE: We can both benefit because trade allows each of us to specialize in doing what we do best. You will spend more time growing potatoes and less time raising cattle. I will spend more time raising cattle and less time growing potatoes. As a result of specialization and trade, each of us can consume more meat and more potatoes without working any more hours.

FIGURE 2 How Trade Expands the Set of Consumption Opportunities

The proposed trade between Frank the farmer and Rose the rancher offers each of them a combination of meat and potatoes that would be impossible in the absence of trade. In panel (a), Frank gets to consume at point A* rather than point A. In panel (b), Rose gets to consume at point B* rather than point B. Trade allows each to consume more meat and more potatoes.

Quick Quiz Draw an example of a production possibilities frontier for Robinson Crusoe, a shipwrecked sailor who spends his time gathering coconuts and catching fish. Does this frontier limit Crusoe’s consumption of coconuts and fish if he lives by himself? Does he face the same limits if he can trade with natives on the island?

3-2 Comparative Advantage: The Driving Force of Specialization

Rose’s explanation of the gains from trade, though correct, poses a puzzle: If Rose is better at both raising cattle and growing potatoes, how can Frank ever specialize in doing what he does best? Frank doesn’t seem to do anything best. To solve this puzzle, we need to look at the principle ofcomparative advantage.

   As a first step in developing this principle, consider the following question: In our example, who can produce potatoes at a lower cost—Frank or Rose? There are two possible answers, and in these two answers lie the solution to our puzzle and the key to understanding the gains from trade.

3-2a Absolute Advantage

One way to answer the question about the cost of producing potatoes is to compare the inputs required by the two producers. Economists use the term  absolute advantage  when comparing the productivity of one person, firm, or nation to that of another. The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good.

absolute advantage

the ability to produce a good using fewer inputs than another producer

   In our example, time is the only input, so we can determine absolute advantage by looking at how much time each type of production takes. Rose has an absolute advantage both in producing meat and in producing potatoes because she requires less time than Frank to produce a unit of either good. Rose needs to input only 20 minutes to produce an ounce of meat, whereas Frank needs 60 minutes. Similarly, Rose needs only 10 minutes to produce an ounce of potatoes, whereas Frank needs 15 minutes. Based on this information, we can conclude that Rose has the lower cost of producing potatoes, if we measure cost in terms of the quantity of inputs.

3-2b Opportunity Cost and Comparative Advantage

There is another way to look at the cost of producing potatoes. Rather than comparing inputs required, we can compare opportunity costs. Recall from  Chapter 1  that the  opportunity cost  of some item is what we give up to get that item. In our example, we assumed that Frank and Rose each spend 8 hours a day working. Time spent producing potatoes, therefore, takes away from time available for producing meat. When reallocating time between the two goods, Rose and Frank give up units of one good to produce units of the other, thereby moving along the production possibilities frontier. The opportunity cost measures the trade-off between the two goods that each producer faces.

opportunity cost

whatever must be given up to obtain some item

   Let’s first consider Rose’s opportunity cost. According to the table in panel (a) of Figure 1, producing 1 ounce of potatoes takes 10 minutes of work. When Rose spends those 10 minutes producing potatoes, she spends 10 minutes less producing meat. Because Rose needs 20 minutes to produce 1 ounce of meat, 10 minutes of work would yield ½ ounce of meat. Hence, Rose’s opportunity cost of producing 1 ounce of potatoes is ½ ounce of meat.

TABLE 1 The Opportunity Cost of Meat and Potatoes

Opportunity Cost of:
1 oz of Meat1 oz of Potatoes
Frank the farmer4 oz potatoes¼ oz meat
Rose the rancher2 oz potatoes½ oz meat

   Now consider Frank’s opportunity cost. Producing 1 ounce of potatoes takes him 15 minutes. Because he needs 60 minutes to produce 1 ounce of meat, 15 minutes of work would yield ¼ ounce of meat. Hence, Frank’s opportunity cost of 1 ounce of potatoes is ¼ ounce of meat.

    Table 1  shows the opportunity costs of meat and potatoes for the two producers. Notice that the opportunity cost of meat is the inverse of the opportunity cost of potatoes. Because 1 ounce of potatoes costs Rose ½ ounce of meat, 1 ounce of meat costs Rose 2 ounces of potatoes. Similarly, because 1 ounce of potatoes costs Frank ¼ ounce of meat, 1 ounce of meat costs Frank 4 ounces of potatoes.

   Economists use the term  comparative advantage  when describing the opportunity costs faced by two producers. The producer who gives up less of other goods to produce Good X has the smaller opportunity cost of producing Good X and is said to have a comparative advantage in producing it. In our example, Frank has a lower opportunity cost of producing potatoes than Rose: An ounce of potatoes costs Frank only ¼ ounce of meat, but it costs Rose ½ ounce of meat. Conversely, Rose has a lower opportunity cost of producing meat than Frank: An ounce of meat costs Rose 2 ounces of potatoes, but it costs Frank 4 ounces of potatoes. Thus, Frank has a comparative advantage in growing potatoes, and Rose has a comparative advantage in producing meat.

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

   Although it is possible for one person to have an absolute advantage in both goods (as Rose does in our example), it is impossible for one person to have a comparative advantage in both goods. Because the opportunity cost of one good is the inverse of the opportunity cost of the other, if a person’s opportunity cost of one good is relatively high, the opportunity cost of the other good must be relatively low. Comparative advantage reflects the relative opportunity cost. Unless two people have the same opportunity cost, one person will have a comparative advantage in one good, and the other person will have a comparative advantage in the other good.

3-2c Comparative Advantage and Trade

The gains from specialization and trade are based not on absolute advantage but on comparative advantage. When each person specializes in producing the good for which he or she has a comparative advantage, total production in the economy rises. This increase in the size of the economic pie can be used to make everyone better off.

   In our example, Frank spends more time growing potatoes, and Rose spends more time producing meat. As a result, the total production of potatoes rises from 40 to 44 ounces, and the total production of meat rises from 16 to 18 ounces. Frank and Rose share the benefits of this increased production.

   We can also look at the gains from trade in terms of the price that each party pays the other. Because Frank and Rose have different opportunity costs, they can both get a bargain. That is, each of them benefits from trade by obtaining a good at a price that is lower than his or her opportunity cost of that good.

   Consider the proposed deal from Frank’s viewpoint. Frank receives 5 ounces of meat in exchange for 15 ounces of potatoes. In other words, Frank buys each ounce of meat for a price of 3 ounces of potatoes. This price of meat is lower than his opportunity cost for an ounce of meat, which is 4 ounces of potatoes. Thus, Frank benefits from the deal because he gets to buy meat at a good price.

   Now consider the deal from Rose’s viewpoint. Rose buys 15 ounces of potatoes for a price of 5 ounces of meat. That is, the price of potatoes is ⅓ ounce of meat. This price of potatoes is lower than her opportunity cost of an ounce of potatoes, which is ½ ounce of meat. Rose benefits because she gets to buy potatoes at a good price.

   The story of Rose the rancher and Frank the farmer has a simple moral, which should now be clear: Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage.

3-2d The Price of the Trade

The principle of comparative advantage establishes that there are gains from specialization and trade, but it raises a couple of related questions: What determines the price at which trade takes place? How are the gains from trade shared between the trading parties? The precise answer to these questions is beyond the scope of this chapter, but we can state one general rule: For both parties to gain from trade, the price at which they trade must lie between the two opportunity costs.

   In our example, Frank and Rose agreed to trade at a rate of 3 ounces of potatoes for each ounce of meat. This price is between Rose’s opportunity cost (2 ounces of potatoes per ounce of meat) and Frank’s opportunity cost (4 ounces of potatoes per ounce of meat). The price need not be exactly in the middle for both parties to gain, but it must be somewhere between 2 and 4.

   To see why the price has to be in this range, consider what would happen if it were not. If the price of meat were below 2 ounces of potatoes, both Frank and Rose would want to buy meat, because the price would be below each of their opportunity costs. Similarly, if the price of meat were above 4 ounces of potatoes, both would want to sell meat, because the price would be above their opportunity costs. But there are only two members of this economy. They cannot both be buyers of meat, nor can they both be sellers. Someone has to take the other side of the deal.

   A mutually advantageous trade can be struck at a price between 2 and 4. In this price range, Rose wants to sell meat to buy potatoes, and Frank wants to sell potatoes to buy meat. Each party can buy a good at a price that is lower than his or her opportunity cost. In the end, each person specializes in the good for which he or she has a comparative advantage and is, as a result, better off.

Quick Quiz Robinson Crusoe can gather 10 coconuts or catch 1 fish per hour. His friend Friday can gather 30 coconuts or catch 2 fish per hour. What is Crusoe’s opportunity cost of catching 1 fish? What is Friday’s? Who has an absolute advantage in catching fish? Who has a comparative advantage in catching fish?

FYI: The Legacy of Adam Smith and David Ricardo

Economists have long understood the gains from trade. Here is how the great economist Adam Smith put the argument:

· It is a maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes but employs a tailor. The farmer attempts to make neither the one nor the other, but employs those different artificers. All of them find it for their interest to employ their whole industry in a way in which they have some advantage over their neighbors, and to purchase with a part of its produce, or what is the same thing, with the price of part of it, whatever else they have occasion for.

David Ricardo

This quotation is from Smith’s 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations, which was a landmark in the analysis of trade and economic interdependence.

   Smith’s book inspired David Ricardo, a millionaire stockbroker, to become an economist. In his 1817 book Principles of Political Economy and Taxation, Ricardo developed the principle of comparative advantage as we know it today. He considered an example with two goods (wine and cloth) and two countries (England and Portugal). He showed that both countries can gain by opening up trade and specializing based on comparative advantage.

   Ricardo’s theory is the starting point of modern international economics, but his defense of free trade was not a mere academic exercise. Ricardo put his beliefs to work as a member of the British Parliament, where he opposed the Corn Laws, which restricted the import of grain.

   The conclusions of Adam Smith and David Ricardo on the gains from trade have held up well over time. Although economists often disagree on questions of policy, they are united in their support of free trade. Moreover, the central argument for free trade has not changed much in the past two centuries. Even though the field of economics has broadened its scope and refined its theories since the time of Smith and Ricardo, economists’ opposition to trade restrictions is still based largely on the principle of comparative advantage.

3-3 Applications of Comparative Advantage

The principle of comparative advantage explains interdependence and the gains from trade. Because interdependence is so prevalent in the modern world, the principle of comparative advantage has many applications. Here are two examples, one fanciful and one of great practical importance.

3-3a Should Tom Brady Mow His Own Lawn?

Tom Brady spends a lot of time running around on grass. One of the most talented football players of all time, he can throw a pass with a speed and accuracy that most casual athletes can only dream of. Most likely, he is talented at other physical activities as well. For example, let’s imagine that Brady can mow his lawn faster than anyone else. But just because he can mow his lawn fast, does this mean he should?

   To answer this question, we can use the concepts of opportunity cost and comparative advantage. Let’s say that Brady can mow his lawn in 2 hours. In that same 2 hours, he could film a television commercial and earn $20,000. By contrast, Forrest Gump, the boy next door, can mow Brady’s lawn in 4 hours. In that same 4 hours, Gump could work at McDonald’s and earn $40.

“They did a nice job mowing this grass.”

IN THE NEWS: Economics within a Marriage

An economist argues that you shouldn’t always unload the dishwasher just because you’re better than your partner at it.

You’re Dividing the Chores Wrong

By Emily Oster

No one likes doing chores. In happiness surveys, housework is ranked down there with commuting as activities that people enjoy the least. Maybe that’s why figuring out who does which chores usually prompts, at best, tense discussion in a household and, at worst, outright fighting.

   If everyone is good at something different, assigning chores is easy. If your partner is great at grocery shopping and you are great at the laundry, you’re set. But this isn’t always—or even usually—the case. Often one person is better at everything. (And let’s be honest, often that person is the woman.) Better at the laundry, the grocery shopping, the cleaning, the cooking. But does that mean she should have to do everything?

   Before my daughter was born, I both cooked and did the dishes. It wasn’t a big deal, it didn’t take too much time, and honestly I was a lot better at both than my husband. His cooking repertoire extended only to eggs and chili, and when I left him in charge of the dishwasher, I’d often find he had run it “full” with one pot and eight forks.

   After we had a kid, we had more to do and less time to do it in. It seemed like it was time for some reassignments. But, of course, I was still better at doing both things. Did that mean I should do them both?

   I could have appealed to the principle of fairness: We should each do half. I could have appealed to feminism—surveys show that women more often than not get the short end of the chore stick. In time-use data, women do about 44 minutes more housework than men (2 hours and 11 minutes versus 1 hour and 27 minutes). Men outwork women only in the areas of “lawn” and “exterior maintenance.” I could have suggested he do more chores to rectify this imbalance, to show our daughter, in the Free To Be You and Me style, that Mom and Dad are equal and that housework is fun if we do it together! I could have simply smashed around the pans in the dishwasher while sighing loudly in the hopes he would notice and offer to do it himself.

   But luckily for me and my husband, I’m an economist, so I have more effective tools than passive aggression. And some basic economic principles provided the answer. We needed to divide the chores because it is simply not efficient for the best cook and dishwasher to do all the cooking and dishwashing. The economic principle at play here is increasing marginal cost. Basically, people get worse when they are tired. When I teach my students at the University of Chicago this principle, I explain it in the context of managing their employees. Imagine you have a good employee and a not-so-good one. Should you make the good employee do literally everything?

   Usually, the answer is no. Why not? It’s likely that the not-so-good employee is better at 9 a.m. after a full night of sleep than the good employee is at 2 a.m. after a 17-hour workday. So you want to give at least a few tasks to your worse guy. The same principle applies in your household. Yes, you (or your spouse) might be better at everything. But anyone doing the laundry at 4 a.m. is likely to put the red towels in with the white T-shirts. Some task splitting is a good idea. How much depends on how fast people’s skills decay.

   To “optimize” your family efficiency (every economist’s ultimate goal—and yours, too), you want to equalize effectiveness on the final task each person is doing. Your partner does the dishes, mows the lawn, and makes the grocery list. You do the cooking, laundry, shopping, cleaning, and paying the bills. This may seem imbalanced, but when you look at it, you see that by the time your partner gets to the grocery-list task, he is wearing thin and starting to nod off. It’s all he can do to figure out how much milk you need. In fact, he is just about as good at that as you are when you get around to paying the bills, even though that’s your fifth task.

   If you then made your partner also do the cleaning—so it was an even four and four—the house would be a disaster, since he is already exhausted by his third chore while you are still doing fine. This system may well end up meaning one person does more, but it is unlikely to result in one person doing everything.

   Once you’ve decided you need to divide up the chores in this way, how should you decide who does what? One option would be randomly assigning tasks; another would be having each person do some of everything. One spousal-advice website I read suggested you should divide tasks based on which ones you like the best. None of these are quite right. (In the last case, how would anyone ever end up with the job of cleaning the bathroom?)

   To decide who does what, we need more economics. Specifically, the principle of comparative advantage. Economists usually talk about this in the context of trade. Imagine Finland is better than Sweden at making both reindeer hats and snowshoes. But they are much, much better at the hats and only a little better at the snowshoes. The overall world production is maximized when Finland makes hats and Sweden makes snowshoes.

   We say that Finland has an absolute advantage in both things but a comparative advantage only in hats. This principle is part of the reason economists value free trade, but that’s for another column (and probably another author). But it’s also a guideline for how to trade tasks in your house. You want to assign each person the tasks on which he or she has a comparative advantage. It doesn’t matter that you have an absolute advantage in everything. If you are much, much better at the laundry and only a little better at cleaning the toilet, you should do the laundry and have your spouse get out the scrub brush. Just explain that it’s efficient!

   In our case, it was easy. Other than using the grill—which I freely admit is the husband domain—I’m much, much better at cooking. And I was only moderately better at the dishes. So he got the job of cleaning up after meals, even though his dishwasher loading habits had already come under scrutiny. The good news is another economic principle I hadn’t even counted on was soon in play:learning by doing. As people do a task, they improve at it. Eighteen months into this new arrangement the dishwasher is almost a work of art: neat rows of dishes and everything carefully screened for “top-rack only” status. I, meanwhile, am forbidden from getting near the dishwasher. Apparently, there is a risk that I’ll “ruin it.”

   Ms. Oster is a professor of economics at the University of Chicago.

Source: Slate, November 21, 2012. The article is found in the link:

   In this example, Brady has an absolute advantage in mowing lawns because he can do the work with a lower input of time. Yet because Brady’s opportunity cost of mowing the lawn is $20,000 and Gump’s opportunity cost is only $40, Gump has a comparative advantage in mowing lawns.

   The gains from trade in this example are tremendous. Rather than mowing his own lawn, Brady should make the commercial and hire Gump to mow the lawn. As long as Brady pays Gump more than $40 and less than $20,000, both of them are better off.

3-3b Should the United States Trade with Other Countries?

Just as individuals can benefit from specialization and trade with one another, as Frank and Rose did, so can populations of people in different countries. Many of the goods that Americans enjoy are produced abroad, and many of the goods produced in the United States are sold abroad. Goods produced abroad and sold domestically are called  imports . Goods produced domestically and sold abroad are called  exports .


goods produced abroad and sold domestically


goods produced domestically and sold abroad

   To see how countries can benefit from trade, suppose there are two countries, the United States and Japan, and two goods, food and cars. Imagine that the two countries produce cars equally well: An American worker and a Japanese worker can each produce one car per month. By contrast, because the United States has more and better land, it is better at producing food: A U.S. worker can produce 2 tons of food per month, whereas a Japanese worker can produce only 1 ton of food per month.

   The principle of comparative advantage states that each good should be produced by the country that has the smaller opportunity cost of producing that good. Because the opportunity cost of a car is 2 tons of food in the United States but only 1 ton of food in Japan, Japan has a comparative advantage in producing cars. Japan should produce more cars than it wants for its own use and export some of them to the United States. Similarly, because the opportunity cost of a ton of food is 1 car in Japan but only ½ car in the United States, the United States has a comparative advantage in producing food. The United States should produce more food than it wants to consume and export some to Japan. Through specialization and trade, both countries can have more food and more cars.

   In reality, of course, the issues involved in trade among nations are more complex than this example suggests. Most important among these issues is that each country has many citizens with different interests. International trade can make some individuals worse off, even as it makes the country as a whole better off. When the United States exports food and imports cars, the impact on an American farmer is not the same as the impact on an American autoworker. Yet, contrary to the opinions sometimes voiced by politicians and pundits, international trade is not like war, in which some countries win and others lose. Trade allows all countries to achieve greater prosperity.

Quick Quiz Suppose that a skilled brain surgeon also happens to be the world’s fastest typist. Should she do her own typing or hire a secretary? Explain.

3-4 Conclusion

You should now understand more fully the benefits of living in an interdependent economy. When Americans buy tube socks from China, when residents of Maine drink orange juice from Florida, and when a homeowner hires the kid next door to mow the lawn, the same economic forces are at work. The principle of comparative advantage shows that trade can make everyone better off.

   Having seen why interdependence is desirable, you might naturally ask how it is possible. How do free societies coordinate the diverse activities of all the people involved in their economies? What ensures that goods and services will get from those who should be producing them to those who should be consuming them? In a world with only two people, such as Rose the rancher and Frank the farmer, the answer is simple: These two people can bargain and allocate resources between themselves. In the real world with billions of people, the answer is less obvious. We take up this issue in  Chapter 4 , where we see that free societies allocate resources through the market forces of supply and demand.


· • Each person consumes goods and services produced by many other people both in the United States and around the world. Interdependence and trade are desirable because they allow everyone to enjoy a greater quantity and variety of goods and services.

· • There are two ways to compare the ability of two people to produce a good. The person who can produce the good with the smaller quantity of inputs is said to have an absolute advantage in producing the good. The person who has the smaller opportunity cost of producing the good is said to have a comparative advantage. The gains from trade are based on comparative advantage, not absolute advantage.

· • Trade makes everyone better off because it allows people to specialize in those activities in which they have a comparative advantage.

· • The principle of comparative advantage applies to countries as well as to people. Economists use the principle of comparative advantage to advocate free trade among countries.

Key Concepts

absolute advantage p. 52

opportunity cost p. 52

comparative advantage p. 53

imports p. 57

exports p. 57

Questions for Review

· 1. Under what conditions is the production possibilities frontier linear rather than bowed out?

· 2. Explain how absolute advantage and comparative advantage differ.

· 3. Give an example in which one person has an absolute advantage in doing something but another person has a comparative advantage.

· 4. Is absolute advantage or comparative advantage more important for trade? Explain your reasoning using the example in your answer to Question 3.

· 5. If two parties trade based on comparative advantage and both gain, in what range must the price of the trade lie?

· 6. Why do economists oppose policies that restrict trade among nations?

Quick Check Multiple Choice

· 1. In an hour, David can wash 2 cars or mow 1 lawn, and Ron can wash 3 cars or mow 1 lawn. Who has the absolute advantage in car washing, and who has the absolute advantage in lawn mowing?

· a. David in washing, Ron in mowing.

· b. Ron in washing, David in mowing.

· c. David in washing, neither in mowing.

· d. Ron in washing, neither in mowing.

· 2. Once again, in an hour, David can wash 2 cars or mow 1 lawn, and Ron can wash 3 cars or mow 1 lawn. Who has the comparative advantage in car washing, and who has the comparative advantage in lawn mowing?

· a. David in washing, Ron in mowing.

· b. Ron in washing, David in mowing.

· c. David in washing, neither in mowing.

· d. Ron in washing, neither in mowing.

· 3. When two individuals produce efficiently and then make a mutually beneficial trade based on comparative advantage,

· a. they both obtain consumption outside their production possibilities frontier.

· b. they both obtain consumption inside their production possibilities frontier.

· c. one individual consumes inside her production possibilities frontier, while the other consumes outside hers.

· d. each individual consumes a point on her own production possibilities frontier.

· 4. Which goods will a nation typically import?

· a. those goods in which the nation has an absolute advantage

· b. those goods in which the nation has a comparative advantage

· c. those goods in which other nations have an absolute advantage

· d. those goods in which other nations have a comparative advantage

· 5. Suppose that in the United States, producing an aircraft takes 10,000 hours of labor and producing a shirt takes 2 hours of labor. In China, producing an aircraft takes 40,000 hours of labor and producing a shirt takes 4 hours of labor. What will these nations trade?

· a. China will export aircraft, and the United States will export shirts.

· b. China will export shirts, and the United States will export aircraft.

· c. Both nations will export shirts.

· d. There are no gains from trade in this situation.

· 6. Mark can cook dinner in 30 minutes and wash the laundry in 20 minutes. His roommate takes half as long to do each task. How should the roommates allocate the work?

· a. Mark should do more of the cooking based on his comparative advantage.

· b. Mark should do more of the washing based on his comparative advantage.

· c. Mark should do more of the washing based on his absolute advantage.

· d. There are no gains from trade in this situation.

Problems and Applications

· 1. Maria can read 20 pages of economics in an hour. She can also read 50 pages of sociology in an hour. She spends 5 hours per day studying.

· a. Draw Maria’s production possibilities frontier for reading economics and sociology.

· b. What is Maria’s opportunity cost of reading 100 pages of sociology?

· 2. American and Japanese workers can each produce 4 cars a year. An American worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year. To keep things simple, assume that each country has 100 million workers.

· a. For this situation, construct a table analogous to the table in Figure 1.

· b. Graph the production possibilities frontiers for the American and Japanese economies.

· c. For the United States, what is the opportunity cost of a car? Of grain? For Japan, what is the opportunity cost of a car? Of grain? Put this information in a table analogous to Table 1.

· d. Which country has an absolute advantage in producing cars? In producing grain?

· e. Which country has a comparative advantage in producing cars? In producing grain?

· f. Without trade, half of each country’s workers produce cars and half produce grain. What quantities of cars and grain does each country produce?

· g. Starting from a position without trade, give an example in which trade makes each country better off.

· 3. Pat and Kris are roommates. They spend most of their time studying (of course), but they leave some time for their favorite activities: making pizza and brewing root beer. Pat takes 4 hours to brew a gallon of root beer and 2 hours to make a pizza. Kris takes 6 hours to brew a gallon of root beer and 4 hours to make a pizza.

· a. What is each roommate’s opportunity cost of making a pizza? Who has the absolute advantage in making pizza? Who has the comparative advantage in making pizza?

· b. If Pat and Kris trade foods with each other, who will trade away pizza in exchange for root beer?

· c. The price of pizza can be expressed in terms of gallons of root beer. What is the highest price at which pizza can be traded that would make both roommates better off? What is the lowest price? Explain.

· 4. Suppose that there are 10 million workers in Canada and that each of these workers can produce either 2 cars or 30 bushels of wheat in a year.

· a. What is the opportunity cost of producing a car in Canada? What is the opportunity cost of producing a bushel of wheat in Canada? Explain the relationship between the opportunity costs of the two goods.

· b. Draw Canada’s production possibilities frontier. If Canada chooses to consume 10 million cars, how much wheat can it consume without trade? Label this point on the production possibilities frontier.

· c. Now suppose that the United States offers to buy 10 million cars from Canada in exchange for 20 bushels of wheat per car. If Canada continues to consume 10 million cars, how much wheat does this deal allow Canada to consume? Label this point on your diagram. Should Canada accept the deal?

· 5. England and Scotland both produce scones and sweaters. Suppose that an English worker can produce 50 scones per hour or 1 sweater per hour. Suppose that a Scottish worker can produce 40 scones per hour or 2 sweaters per hour.

· a. Which country has the absolute advantage in the production of each good? Which country has the comparative advantage?

· b. If England and Scotland decide to trade, which commodity will Scotland trade to England? Explain.

· c. If a Scottish worker could produce only 1 sweater per hour, would Scotland still gain from trade? Would England still gain from trade? Explain.

· 6. The following table describes the production possibilities of two cities in the country of Baseballia:

Pairs of Red Socks per Worker per HourPairs of White Socks per Worker per Hour

· a. Without trade, what is the price of white socks (in terms of red socks) in Boston? What is the price in Chicago?

· b. Which city has an absolute advantage in the production of each color sock? Which city has a comparative advantage in the production of each color sock?

· c. If the cities trade with each other, which color sock will each export?

· d. What is the range of prices at which trade can occur?

· 7. A German worker takes 400 hours to produce a car and 2 hours to produce a case of wine. A French worker takes 600 hours to produce a car and X hours to produce a case of wine.

· a. For what values of X will gains from trade be possible? Explain.

· b. For what values of X will Germany export cars and import wine? Explain.

· 8. Suppose that in a year an American worker can produce 100 shirts or 20 computers and a Chinese worker can produce 100 shirts or 10 computers.

· a. For each country, graph the production possibilities frontier. Suppose that without trade the workers in each country spend half their time producing each good. Identify this point in your graphs.

· b. If these countries were open to trade, which country would export shirts? Give a specific numerical example and show it on your graphs. Which country would benefit from trade? Explain.

· c. Explain at what price of computers (in terms of shirts) the two countries might trade. d. Suppose that China catches up with American productivity so that a Chinese worker can produce 100 shirts or 20 computers. What pattern of trade would you predict now? How does this advance in Chinese productivity affect the economic wellbeing of the citizens of the two countries?

· 9. Are the following statements true or false? Explain in each case.

· a. “Two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of all goods.”

· b. “Certain very talented people have a comparative advantage in everything they do.”

· c. “If a certain trade is good for one person, it can’t be good for the other one.”

· d. “If a certain trade is good for one person, it is always good for the other one.”

· e. “If trade is good for a country, it must be good for everyone in the country.”

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hipaa includes in its definition of “research,” activities related to …

Data are made anonymous by

-Destroying all identifiers connected to the data.

-Requiring all members of the research team to sign confidentiality agreements.

-Keeping the key linking names to responses in a secure location.

-Reporting data in aggregate form in publications resulting from the research.

In a longitudinal study that will follow children from kindergarten through high school and will collect information about illegal activities, which of the following confidentiality procedures would protect against compelled disclosure of individually identifiable information?

-Using data encryption for stored files.

-Securing a Certificate of Confidentiality.

-Waiving documentation of consent.

-Using pseudonyms in research reports.

When a focus group deals with a potentially sensitive topic, which of the following statements about providing confidentiality to focus group participants is correct?

-If group members know each other confidentiality is not an issue.

-Using pseudonyms in reports removes the concern about any confidences shared in the group.

-The researcher cannot control what participants repeat about others outside the group.

-If group participants sign confidentiality agreements, the researcher can guarantee confidentiality.

A researcher leaves a research file in her car while she attends a concert and her car is stolen. The file contains charts of aggregated numerical data from a research study with human subjects, but no other documents. The consent form said that no identifying information would be retained, and the researcher adhered to that component. Which of the following statements best characterizes what occurred?

There was neither a violation of privacy nor a breach of confidentiality

-The subjects’ privacy has been violated.

-Confidentiality of the data has been breached

-There was both a violation of privacy and a breach of confidentiality.

Which of the following constitutes both a breach of a confidentiality (the research data have been disclosed, counter to the agreement between researcher and subjects) and a violation of subjects’ privacy (the right of the individuals to be protected against intrusion into their personal lives or affairs)?

-A researcher asks cocaine users to provide names and contact information of other cocaine users who might qualify for a study.

-A faculty member makes identifiable data about sexual behavior available to graduate students, although the subjects were assured that the data would be de-identified.

-A researcher, who is a guest, audio-records conversations at a series of private dinner parties to assess gender roles, without informing participants.

-In order to eliminate the effect of observation on behavior, a researcher attends a support group and records interactions without informing the attendees.

An investigator is studying women recently admitted to a state prison. All potential subjects must have children under the age of five. Research subjects will be given a basket of toys to use at their children’s first visit that the children can then take home. In assessing this proposal, the IRB needs to determine that the toys are:


-Not an excessive incentive.

-Of high quality.

-Age appropriate.

An investigator is examining the quality of life for prisoners who are HIV positive using surveys followed by interview. The IRB must ensure that:

The survey instrument is standardized.

Confidentiality of the prisoners’ health status is maintained.

All prisoners receive HIV testing.

A medical doctor serves as co-investigator.

Which of the following statements about prison research is true?

Participation in research can be considered during parole hearings.

Researchers may study the effects of privilege upgrades awarded by the prison.

It is permissible for risks to be higher than those that would be accepted by non-prisoners.

The regulations prohibit compensating prisoners.

A graduate student wants to examine the effect of print media versus televised media on individuals’ position on several social issues. The superintendent of a local work release facility, a family friend, will allow the graduate student access to the prison population to help her quickly accrue subjects. The student’s IRB should:

Approve this project but submit it for federal review.

Approve this project since the risk appears to be no more than minimal.

Not approve this project because the prisoners are merely a population of convenience for the student.

Approve this project since the superintendent is the ultimate authority on what happens in his facility.

Which of the following statements most accurately describes the requirement for the documentation of minors’ assent to participate in research?

Parents must approve written documentation.

To protect minors documentation is always required.

Documentation is required unless waived by an IRB.

Federal regulations do not require the documentation of minors’ assent.

According to Subpart D, research with children may be eligible for exemption when:

The research involves the use of educational tests

The children will be interviewed by the researcher.

The research with children will involve participant observation with researcher interaction.

The children will be asked to complete a survey

A researcher asks an IRB to waive the requirement for parental permission for a study conducted in schools because the nature of the research requires participation of all the children present in classrooms on the day the research will take place. Assuming that the basic research design could be approved by the IRB and the school, which of the following requirements must be met before an IRB could waive parental permission?

Parents must be notified that the study is taking place.

The students must be offered an optional classroom activity.

An independent consultant must approve the waiver.

The research must pose no more than minimal risk.

A study that involves interviews of adults is eligible for expedited review. The researcher wants to add an adolescent population (aged 12 to 17) to the study and has designed a parental permission and assent process. No additional changes are planned. Which of the following statements about review of the revised protocol is accurate?

The research would only be eligible for expedited review if the adolescents are capable of understanding the same consent forms used for the adult population.

The research would only be eligible for expedited review if the adolescents have been declared to be emancipated minors.

Unless the nature of the questions would raise the level of risk to more than minimal for adolescents, the research would still qualify for expedited review.

The new research would need full review by a convened IRB because children are a protected population.

Parental notification, in lieu of active parental permission, is allowed when:

The researcher anticipates a low response rate.

An IRB has approved a waiver of the requirement for parental permission.

The researcher has conducted a similar study at another institution.

The superintendent of schools and the principals have approved the study.

According to Subpart D, which of the following research activities with children would qualify for an exemption?

Survey procedures

Observation of public behavior when the researcher participates in the activities being observed.


Research about educational testing

The purpose of the Family Educational Rights and Privacy Act (FERPA) is to:

Ensure that surveys do not ask school children to provide sensitive information about their parents.

Provide parents certain rights over their children’s educational records.

Give school principals the right to discuss students’ behavioral problems with their parents.

Allow school counselors to access students’ grades.

Which federal regulation or law governs how researchers can obtain data about subjects’ disciplinary status in school from academic records?

The No Child Left Behind Act.

Subpart D of 45 CFR 46.

The Protection of Pupil Rights Amendment.

The Family Educational Rights and Privacy Act.

Which of the following is the LEAST important activity when protecting human subjects in international research?

Determining if the research might present unique risks to subjects given local socio-economic conditions.

Considering local customs, norms, and laws.

Assessing transportation conditions

Consulting with members of the community from which subjects will be recruited.

The age of majority in international research is determined by the

Legal drinking age where the research will take place.

Laws in the state where the researchers’ institution resides.

Laws, customs, and norms in the area in which the research will be conducted.

The research sponsor.

Which of the following activities constitutes engagement in research?

Providing potential subjects with written information about a study.

Obtaining informed consent and conducting research interviews.

Informing prospective subjects about the availability of research.

Obtaining subjects’ permission for researchers to contact them.

Researchers endeavoring to conduct an on-line study should consider that there are some potential risks of harm to subjects unique to Internet-based research. One of these risks is:

People assume pseudonymous on-line identities, such as an avatar in an MMORPG.

Online studies do not require the documentation of informed consent.

Recruiting, consenting and debriefing subjects takes place on-line, and may require little to no interaction with the subjects.

Individuals may post private identifiable information about themselves on-line without intending it to be public and available to researchers.

Which of the following on-line research strategies raises the most concerns regarding the ethical principle of respecting the autonomy of research subjects and the corresponding federal regulations requiring informed consent?

A linguist copies portions of postings on a political blog to document the use of expletives, abbreviations, and the use of irony in the postings.

A researcher posts a notice on an open on-line support group for interracial adoptees asking anyone who would be interested in being interviewed for her study to contact her.

A researcher observes the communications in an open support group without announcing her presence. She is interested in observing how long members participate and how the membership shifts over time.

A researcher proposes to join a moderated support group for cancer survivors posing as a survivor. She plans to insert comments to see how the members respond.

Consent to participate in research is an ongoing process. Which of the following strategies would help ensure that participation in a survey about a sensitive personal topic remains voluntary throughout a study?

Designing the survey so that subjects are not forced to answer one question before going to the next.

Giving examples in the consent process of the kinds of questions that will be asked.

Including the institution’s privacy policy on the survey site.

Providing a thorough debriefing at the end of the study.

To minimize potential risks of harm, a researcher conducting an on-line survey can:

Specify that all respondents must be legal adults.

Suggest that subjects print a copy of the informed consent form for their records.

Comply with the survey software’s Terms of Service agreement.

Design the survey so that no direct or indirect identifiers are collected.

Which of the following examples of using the Internet to conduct research meets the federal definition of research with human subjects?

Downloading a publically available dataset that includes high school students’ academic achievement rates. The data are in aggregate and were derived from multiple school districts from different states.

Gathering data to supplement an oral history project about a local civil rights activist. The activist passed away while the researcher was in the process of conducting in-person interviews with the individual’s social network.

Conducting an on-line focus group with cancer survivors to determine familial support systems. The researcher also invites subjects’ significant others to be a part of the focus group.

Analyzing a website visitor report from several pro-anorexia blogs to determine the popularity of each blog. Access to the blogs is not restricted.

A covered entity may use or disclose PHI without an authorization, or documentation of a waiver or an alteration of authorization, for all of the following EXCEPT:

Use of decedents’ information, with certain representations by the researcher.

Data that does not cross state lines when disclosed by the covered entity.

Activities preparatory to research, with certain representations by the researcher.

Limited data set with an approved data use agreement.

Under HIPAA, a “disclosure accounting” is required:

for all human subjects research that uses PHI without an authorization from the data subject, except for limited data sets.

for all research where the data crosses state lines, otherwise state law applies.

for all human subjects research that uses PHI.

solely at the principle investigator’s discretion.

HIPAA protects a category of information known as protected health information (PHI). PHI includes:

identifiable health information that is created or held by covered entities, provided the data subject is a US citizen.

identifiable health information that is created or held by covered entities.

any identifiable health information.

Identifiable health information that is created or held by covered entities that operate across state lines.

When required, the information provided to the data subject in a HIPAA disclosure accounting …

must be more detailed for disclosures that involve fewer than 50 subject records.

is always the same, regardless of the number of records involved.

is limited to the information elements the data subject specifically requests.

is at the discretion of the organization, given its accounting policies.

HIPAA includes in its definition of “research,” activities related to …

anything a researcher does in a federally-supported laboratory.

development of generalizable knowledge.

quality assessment and improvement.

population health.

Vulnerable persons are those who are less able to protect themselves than other persons in a given situation. The Common Rule (45 CFR 46) has specific requirements for the following vulnerable populations, except:

Pregnant Women




When workers are asked to participate in a research study, vulnerabilities related to the subject’s employment may include:

Unions may encourage employees to participate with the expectation that “entitlements” may follow from study results.

The research study’s finding could affect an employee’s pay, benefits or promotion potential.

The employer may encourage or deny participation of workers.

Employees may experience pressure from management to participate in the study because the employer perceives the study to be advantageous to the organization.

All of the above

Researcher access to confidential records adds to the vulnerability of workers who participate in workplace studies. Inappropriate release of identifiable private information could adversely affect a worker’s retention of a job, insurance or other employment related benefits. To avoid or minimize these risks, the study design must include adequate safeguards to protect the confidentiality of the information collected. A plan for the proper management of study data and records should clearly define:

Who will have access to the data.

If personal identifiers will be retained and used in the data analysis.

How the data will be collected and secured.

If the study results, if any, will be included in the employee’s personnel records.

All of the above

When a research project includes the collection of biological samples, all planned future uses of the samples, identifiers, and the data obtained from the samples, must be fully explained to the research subject.



The 1998 FDA regulations for requiring disclosure of significant financial interest reflect which threshold:

Any equity interest in a publicly held company that exceeds $5,000

Any equity interest in a publicly held company that exceeds $30,000

Any equity interest in a publicly held company that exceeds $50,000

Any equity interest in a publicly held company that exceeds $15,000

A situation in which financial or other personal considerations have the potential to compromise or bias professional judgment and objectivity is an example of:

Conflict of Interest


Research Misconduct


According to the DHHS 2011 updated of the PHS federal regulations, the threshold amount for reporting a significant financial interest (investigator and his/her spouse and dependents) is:

Greater than $5,000 of ownership in any single public entity/company.

$25,000 and 5% of ownership in any single entity/company.

Greater than $2,000 or 2% of ownership in any single entity/company.

Greater than $10,000 or 5% of ownership in any single entity/company.

The most important ethical concerns related to conflicts of interest in research are:

Maintaining a supply of volunteers for research studies and their active involvement in research

Ensuring the objectivity of research and the protection of human subjects

Protecting proprietary information and fidelity to contracts with sponsors

Establishing open dialog with sponsors and security of study records

A conflict of interest implies:

The elimination of bias.

The actual involvement of bias.

An awareness of bias.

The potential for bias.

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umuc bookstore

STAT 225 Section 6380

Summer 2015

Quiz #2

Please answer all 12 questions. The maximum score for each question is posted at the beginning of the question, and the maximum score for the quiz is 80 points. Make sure your answers are as complete as possible and show your work/argument. In particular, when there are calculations involved, you should show how you come up with your answers with necessary tables, if applicable. Answers that come straight from program software packages will not be accepted. The quiz is due by midnight, Sunday, June 28, Eastern Daylight Saving Time.

IMPORTANT: Per the direction of the Dean’s Office, you are requested to include a brief note at the beginning of your submitted quiz, confirming that your work is your own.

By typing my signature below, I pledge that this is my own work done in accordance with the UMUC Policy 150.25 – Academic Dishonesty and Plagiarism ( on academic dishonesty and plagiarism. I have not received or given any unauthorized assistance on this assignment/examination.


Electronic Signature

Your submitted quiz will be accepted only if you have included this statement.

1. (10 points) Once upon a time, I had a fast-food lunch with a mathematician colleague. I noticed a very strange behavior in him. I called it the Au-Burger Syndrome since it was discovered by me at a burger joint. Based on my unscientific survey, it is a rare but real malady inflicting 2% of mathematicians worldwide. Yours truly has recently discovered a screening test for this rare malady, and the finding has just been reported to the International Association of Insane Scientists (IAIS) for publication. Unfortunately, my esteemed colleagues who reviewed my submitted draft discovered that the reliability of this screening test is only 80%. What it means is that it gives a positive result, false positive, in 20% of the mathematicians tested even though they are not afflicted by this horribly-embarrassing malady.

I have found an unsuspecting victim, oops, I mean subject, down the street. This good old mathematician is tested positive! What is the probability that he is actually inflicted by this rare disabling malady?

2. (5 points) Most of us love Luzon mangoes, but hate buying those that are picked too early. Unfortunately, by waiting until the mangos are almost ripe to pick carries a risk of having 15% of the picked rot upon arrival at the packing facility. If the packing process is all done by machines without human inspection to pick out any rotten mangos, what would be the probability of having at most 2 rotten mangos packed in a box of 12?

3. (5 points) We have 7 boys and 3 girls in our church choir. There is an upcoming concert in the local town hall. Unfortunately, we can only have 5 youths in this performance. This performance team of 5 has to be picked randomly from the crew of 7 boys and 3 girls.

a. What is the probability that all 3 girls are picked in this team of 5? b. What is the probability that none of the girls are picked in this team of 5? c. What is the probability that 2 of the girls are picked in this team of 5?

4. (10 points) In this economically challenging time, yours truly, CEO of the Outrageous Products Enterprise, would like to make extra money to support his frequent filet-mignon-and- double-lobster-tail dinner habit. A promising enterprise is to mass-produce tourmaline wedding rings for brides. Based on my diligent research, I have found out that women’s ring size normally distributed with a mean of 6.0, and a standard deviation of 1.0. I am going to order 5000 tourmaline wedding rings from my reliable Siberian source. They will manufacture ring size from 4.0, 4.5, 5.0, 5.5, 6.0, 6.5, 7.0, 7.5, 8.0, 8.5, 9.0, and 9.5. How many wedding rings should I order for each of the ring size should I order 5000 rings altogether? (Note: It is natural to assume that if your ring size falls between two of the above standard manufacturing size, you will take the bigger of the two.)

5. (5 points) A soda company want to stimulate sales in this economic climate by giving customers a chance to win a small prize for ever bottle of soda they buy. There is a 20% chance that a customer will find a picture of a dancing banana ( ) at the bottom of the cap upon opening up a bottle of soda. The customer can then redeem that bottle cap with this picture for a small prize. Now, if I buy a 6-pack of soda, what is the probability that I will win something, i.e., at least winning a single small prize?

6. (5 points) When constructing a confidence interval for a population with a simple random sample selected from a normally distributed population with unknown σ, the Student t- distribution should be used. If the standard normal distribution is correctly used instead, how would the confidence interval be affected?

7. (10 points) Below is a summary of the Quiz 1 for two sections of STAT 225 last spring. The questions and possible maximum scores are different in these two sections. We notice that Student A4 in Section A and Student B2 in Section B have the same numerical score.

Section A

Student Score

Section B

Student Score A1 70 B1 15 A2 42 B2 61 A3 53 B3 48 A4 61 B4 90 A5 22 B5 85 A6 87 B6 73 A7 59 B7 48

—– —— B8 39

How do these two students stand relative to their own classes? And, hence, which student performed better? Explain your answer.

8. (5 points) My brother wants to estimate the proportion of Canadians who own their house. What sample size should be obtained if he wants the estimate to be within 0.02 with 90% confidence if

a. he uses an estimate of 0.675 from the Canadian Census Bureau? b. he does not use any prior estimates? But in solving this problem, you are actually using a

form of “prior” estimate in the formula used. In this case, what is your “actual” prior estimate? Please explain.

9. (5 points) An amusement park is considering the construction of an artificial cave to attract visitors. The proposed cave can only accommodate 36 visitors at one time. In order to give everyone a realistic feeling of the cave experience, the entire length of the cave would be chosen such that guests can barely stand upright for 98% of the all the visitors.

The mean height of American men is 70 inches with a standard deviation of 2.5 inches. An amusement park consultant proposed a height of the cave based on the 36-guest-at-a-time capacity. Construction will commence very soon.

The park CEO has a second thought at the last minute, and asks yours truly if the proposed height is appropriate. What would be the proposed height of the amusement park consultant? And do you think that it is a good recommendation? If not, what should be the appropriate height? Why?

10. (5 points) A department store manager has decided that dress code is necessary for team coherence. Team members are required to wear either blue shirts or red shirts. There are 9 men and 7 women in the team. On a particular day, 5 men wore blue shirts and 4 other wore red shirts, whereas 4 women wore blue shirts and 3 others wore red shirt. Apply the Addition Rule to determine the probability of finding men or blue shirts in the team.

Please refer to the following information for Question 11 and 12.

It is an open secret that airlines overbook flights, but we have just learned that bookstores underbook (I might have invented this new term.) textbooks in the good old days that we had to purchase textbooks.

To make a long story short, once upon a time, our UMUC designated virtual bookstore, MBS Direct, routinely, as a matter of business practice, orders less textbooks than the amount requested by UMUC’s Registrar’s Office. That is what I have figured out……. Simply put, MBS Direct has to “eat” the books if they are not sold. Do you want to eat the books? You may want to cook the books before you eat them! Oops, I hope there is no account major in this class?

OK, let us cut to the chase….. MBS Direct believes that only 85% of our registered students will stay registered in a class long enough to purchase the required textbook. Let’s pick on our STAT 200 students. According to the Registrar’s Office, we have 600 students enrolled in STAT 200 this spring 2014.

11. (10 points) Suppose you are the CEO of MBS Direct, and you want to perform a probability analysis. What would be the number of STAT 200 textbook bundles you would order so that

you stay below 5% probability of having to back-order from Pearson Custom Publishing? (Note: Our Provost would be very angry when she hears that textbook bundles have to be back- ordered. In any case, we no longer need the service of MBS Direct as we are moving to 100% to free eResources. Auf Wiedersehen, MBS Direct……)

IMPORTANT: Yes, you may use technology for tacking Question 11 in this quiz.

12. (5 points) Is there an approximation method for Question 11? If so, please tackling Question 11 with the approximation method.

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mamdouh babi

Residency @ UC Northern Kentucky NKY CAMPUS – Florence, KY

June 29 – July 01, 2018

Dr. Mamdouh Babi

Friday, June 29, 2018

5:00pm – 6:00pm – Check in

6:00pm – 8:00pm – Network Security and Project Overview

8:00pm – 10:00pm – Project Research

Saturday, June 20, 2018

8:00am – 10:00am – Class start – Project Research continue

12:00pm – 1:00pm – Lunch

1:00pm – 3:00pm – Project Presentation G1 & G2

3:00pm – 5:00pm – Project Presentation G3 & G4

5:00pm – 6:00pm – Dinner

6:00pm – 8:00pm – Project Presentation G5 & G6

8:00pm – 10:00pm – Project Presentation G7& G8

Sunday, July 01, 2018

8:00am – 9:00am – Class Start – Discussion

9:00am – 10:00am – Project Presentation Cont.…

10:0am – 11:00am – Conclusion

11:00am – 12:00pm – Q/A

12:00pm – Checkout


What is a Network

Network Types



Ring , Star , Bus

Network Risks

Vulnerability is a weak spot in your network that might be exploited by a security threat.

Computer Networking


firewall is a network security system that monitors and controls incoming and outgoing network traffic based on predetermined security rules.

Firewalls are often categorized as:

Network firewalls: filter traffic between two or more networks and run on network hardware.

Host-based firewalls: run on host computers and control network traffic in and out of those machines.

Network Security – Firewalls

Virtual Private Network (VPN):

extends a private network across a public network, and enables users to send and receive data across shared or public networks as if their computing devices were directly connected to the private network.

Applications running across the VPN may therefore benefit from the functionality, security, and management of the private network. *

*Mason, Andrew G. (2002). Cisco Secure Virtual Private Network. Cisco Press. p. 7.

Network Security – VPN

Project Development Life Cycle

The key model behind the network design process is known as the network development life cycle (NDLC)

Network Development Life Cycle

Project Analysis

Information gathering—scope, Requirement.


Flow charts, Flow Diagram, Mock-up, etc…

Purchasing decisions—which switches, routers, firewalls, servers and so on are needed

Ordering equipment


Configuring and installing the servers and network equipment, and testing connectivity and functionality





Creating your document, document your resources, etc..

Planning Network Projects

Think of your presentation as a verbal executive summary. Your presentation should be in the form of Power Point Presentation (PPP).

Your presentation should include a minimum of 15 slides (not including title slide).


Remember, you are presenting the good knowledge of your work and should include the merit of your ideas and knowledge. In order to achieve these goals, at the end of the presentation your audience should:

Understand the initial requirement and why it is worth addressing.

Understand how you are addressing your project.

Know what features have you implemented.

Be confident of your knowledge.


Your slides should include the following sections (everything you need is in the Telecommunications Case Assignment document):

Introduction: In this section, you will introduce the project and the objectives of the project including executive summary.

Requirement Analysis: In this section, you will discuss the requirement.

Design: You need diagrams, charts, pics, etc..


Implementation: diagrams, charts, and possibly screen shots.

Testing (optional): You can present your data testing in this section.

Cost analysis: Estimated cost (you can use the internet to get pricing). Make sure to include labor cost in your analysis.

Conclusion: Summary, lesson learned, future work, etc..



You can assume that your audience has a similar level of technical background to yours, although they know nothing about your project.

Use this presentation as an opportunity to highlight the strengths of your project; i.e. make sure to point out any particularly unusual or creative features.


Power Point Presentation (PPP) additional Instructions:

In order to be most effective, here are some general design guidelines:

Include visual items (diagrams, charts, screen shots).

Use larger font than you would use for a written paper (i.e. don’t use 12 point!).


Acme Corporation is a new startup

wishes to sale:

their new phone to the public called Acmephone,

a more secure version of the phone to business organizations, called the Acmephone B+, and

highly secure version of the phone, called the Acmephone G+, to the government.

Network Security Project

Due to the fear of corporate espionage and government security requirements, there are many security concerns that must be addressed.

As a security professional, you have been employed to design a network infrastructure for their two campuses located in Atlanta and Cincinnati

Network Security Project

based upon the following specifications:

1. There needs to be a constant connection between the two locations that can carry at least 50 Mbps of data.

2. Each facility has three floors. The buildings are rectangular with each floor being 350’x350’.

3. There will be 200 network connections on each floor with an additional 100 network connections in the data centers located on the third floor of each building.

Network Security Project – Specifications

4. The primary data center will be located at the Atlanta location.

5. There will be a failover* data center at the Cincinnati location.

* Failover is a method of protecting computer systems from failure, in which standby equipment automatically takes over when the main system fails.

6. Each location should be protected from intrusions that are not limited to state change attacks.

7. The Atlanta location will house the two secure development teams. As such, it will need the most security. To further complicate the design, there will be database servers and the corporate Web servers housed at that location as well.

Network Security Project – Specifications

8. There will be database servers located at the Cincinnati site.

9. The servers must have redundancy.

10. The solution must have a plan to verify security measures.

Network Security Project – Specifications

Your job is to develop a network design to meet the requirements above.

1. You should submit a network drawing listing the network’s topology including any necessary hardware.

2. You should list any recommended cable.

3. You can recommend wiring closets wherever you need them.

Network Security Project

4. You should recommend ways to assure that you are not getting attacked.

5. You should build traps to stop attackers.

6. You should recommend any WAN or wireless technologies.

7. You should recommend any technology needed in the data center for high availability.

8. Justify your recommendations.

Network Security Project

Number of Pages – not limited

Use APA format

Project’s Document

Include the following sections:

Abstract: Describe the problem and the solution you presenting (few lines)

Introduction: In this section, you will introduce the project and the objectives of the project including executive summary.

Requirement Analysis: In this section, you will discuss the requirement

Design: You need diagrams, charts, pics, etc..

Implementation: diagrams, charts, and possibly screen shots

Testing (optional): You can present your data testing in this section

Cost analysis: Estimated cost (you can use the internet to get pricing). Make sure to include labor cost in your analysis.

Conclusion: Summary, lesson learned, future work, etc..


Project’s Document

Upload your

1. Project documentation and

2. Power Point Presentation

to iLearn Bb by:

August 14, 2018 @ 11:59pm EST

Will not accepted after this date.

Project’s Document

Computer Networking

Network Security, Firewalls and VPNs

Project Development Life Cycle

Network Development Life Cycle

Requirement Analysis






Project – Case Study

Project – Case Study Presentation

Project – Case Study Documentation



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suppose you are evaluating a project with the expected future cash

Net Present Value and Other Investment Rules

When a company is deciding whether to invest in a new project, large sums of money can be at stake. For example, in October 2014, Badlands NGL announced plans to build a $4 billion polyethylene plant in North Dakota, which was the largest private-sector investment made in that state’s history. Earlier in 2014, Samsung Electronics announced plans to build a $14.7 billion chip facility in South Korea. The chip plant was expected to employ 150,000 workers when it was completed. But neither of these announcements came close to the Artic LNG project, which was being developed by ExxonMobil, ConocoPhillips, BP, pipeline company TransCanada, and the state of Alaska. The Artic LNG project would build a pipeline from Alaska’s North Slope to allow natural gas to be sent from the area.

The cost of the pipeline and plant to clean the gas of impurities was expected to be $45 to $65 billion. Decisions such as these, with price tags in the billions, are obviously major undertakings, and the risks and rewards must be carefully weighed. In this chapter, we discuss the basic tools used in making such decisions.

In Chapter 1, we show that increasing the value of a company’s stock is the goal of financial management. Thus, what we need to know is how to tell whether a particular investment will achieve that purpose or not. This chapter considers a variety of techniques financial analysts routinely use. More importantly, it shows how many of these techniques can be misleading, and it explains why the net present value approach is the right one.

5.1 Why Use Net Present Value?

Find out more about capital budgeting for small businesses at

This chapter, as well as the next two, focuses on capital budgeting, the decision-making process for accepting or rejecting projects. This chapter develops the basic capital budgeting methods, leaving much of the practical application to subsequent chapters. But we don’t have to develop these methods from scratch. In Chapter 4, we pointed out that a dollar received in the future is worth less than a dollar received today. The reason, of course, is that today’s dollar can be reinvested, yielding a greater amount in the future. And we showed in Chapter 4 that the exact worth of a dollar to be received in the future is its present value. Furthermore, Section 4.1 suggested calculating the net present value of any project. That is, the section suggested calculating the difference between the sum of the present values of the project’s future cash flows and the initial cost of the project.

The net present value (NPV) method is the first one to be considered in this chapter. We begin by reviewing the approach with a simple example. Then, we ask why the method leads to good decisions.



Net Present Value  The Alpha Corporation is considering investing in a riskless project costing $100. The project receives $107 in one year and has no other cash flows. The riskless discount rate on comparable riskless investments is 2 percent.

The NPV of the project can easily be calculated as:


From Chapter 4, we know that the project should be accepted because its NPV is positive. This is true because the project generates $107 of future cash flows from a $100 investment whereas comparable investments only generate $102.

The basic investment rule can be generalized to:

Accept a project if the NPV is greater than zero.

Reject a project if the NPV is less than zero.

We refer to this as the NPV rule.

Why does the NPV rule lead to good decisions? Consider the following two strategies available to the managers of Alpha Corporation:

1. Use $100 of corporate cash to invest in the project. The $107 will be paid as a dividend in one year.

2. Forgo the project and pay the $100 of corporate cash to stockholders as a dividend today.

If Strategy 2 is employed, the stockholder might deposit the cash dividend in a bank for one year. With an interest rate of 2 percent, Strategy 2 would produce cash of $102 (=$100 X 1.02) at the end of the year. The stockholder would prefer Strategy 1 because Strategy 2 produces less than $107 at the end of the year.

Our basic point is:

Accepting positive NPV projects benefits the stockholders.

How do we interpret the exact NPV of $4.90? This is the increase in the value of the firm from the project. For example, imagine that the firm today has productive assets worth $V and has $100 of cash. If the firm forgoes the project, the value of the firm today would simply be:

$V + $100

If the firm accepts the project, the firm will receive $107 in one year but will have no cash today. Thus, the firm’s value today would be:

The difference between these equations is just $4.90, the net present value of Equation 5.1. Thus:

The value of the firm rises by the NPV of the project.

Note that the value of the firm is merely the sum of the values of the different projects, divisions, or other entities within the firm. This property, called value additivity, is quite important. It implies that the contribution of any project to a firm’s value is simply the Page 137NPV of the project. As we will see later, alternative methods discussed in this chapter do not generally have this nice property.

The NPV rule uses the correct discount rate.

One detail remains. We assumed that the project was riskless, a rather implausible assumption. Future cash flows of real-world projects are invariably risky. In other words, cash flows can only be estimated, rather than known. Imagine that the managers of Alpha expect the cash flow of the project to be $107 next year. That is, the cash flow could be higher, say $117, or lower, say $97. With this slight change, the project is risky. Suppose the project is about as risky as the stock market as a whole, where the expected return this year is perhaps 10 percent. Then 10 percent becomes the discount rate, implying that the NPV of the project would be:

Because the NPV is negative, the project should be rejected. This makes sense: A stockholder of Alpha receiving a $100 dividend today could invest it in the stock market, expecting a 10 percent return. Why accept a project with the same risk as the market but with an expected return of only 7 percent?


Calculating NPVs with a Spreadsheet

Spreadsheets are commonly used to calculate NPVs. Examining the use of spreadsheets in this context also allows us to issue an important warning. Consider the following:

In our spreadsheet example, notice that we have provided two answers. The first answer is wrong even though we used the spreadsheet’s NPV formula. What happened is that the “NPV” function in our spreadsheet is actually a PV function; unfortunately, one of the original spreadsheet programs many years ago got the definition wrong, and subsequent spreadsheets have copied it! Our second answer shows how to use the formula properly.

The example here illustrates the danger of blindly using calculators or computers without understanding what is going on; we shudder to think of how many capital budgeting decisions in the real world are based on incorrect use of this particular function.

Page 138Conceptually, the discount rate on a risky project is the return that one can expect to earn on a financial asset of comparable risk. This discount rate is often referred to as an opportunity cost because corporate investment in the project takes away the stockholder’s option to invest the dividend in other opportunities. Conceptually, we should look for the expected return of investments with similar risks available in the capital markets. The calculation of the discount rate is by no means impossible. We forgo the calculation in this chapter but present it in later chapters of the text.

Having shown that NPV is a sensible approach, how can we tell whether alternative methods are as good as NPV? The key to NPV is its three attributes:

1. NPV uses cash flows. Cash flows from a project can be used for other corporate purposes (such as dividend payments, other capital budgeting projects, or payments of corporate interest). By contrast, earnings are an artificial construct. Although earnings are useful to accountants, they should not be used in capital budgeting because they do not represent cash.

2. NPV uses all the cash flows of the project. Other approaches ignore cash flows beyond a particular date; beware of these approaches.

3. NPV discounts the cash flows properly. Other approaches may ignore the time value of money when handling cash flows. Beware of these approaches as well.

Calculating NPVs by hand can be tedious. A nearby Spreadsheet Applications box shows how to do it the easy way and also illustrates an important caveat calculator.

5.2 The Payback Period Method


One of the most popular alternatives to NPV is payback. Here is how payback works: Consider a project with an initial investment of -$50,000. Cash flows are $30,000, $20,000, and $10,000 in the first three years, respectively. These flows are illustrated in Figure 5.1. A useful way of writing down investments like the preceding is with the notation:

(−$50,000, $30,000, $20,000, $10,000)

The minus sign in front of the $50,000 reminds us that this is a cash outflow for the investor, and the commas between the different numbers indicate that they are received—or if they are cash outflows, that they are paid out—at different times. In this example we are Page 139assuming that the cash flows occur one year apart, with the first one occurring the moment we decide to take on the investment.

Figure 5.1  Cash Flows of an Investment Project

The firm receives cash flows of $30,000 and $20,000 in the first two years, which add up to the $50,000 original investment. This means that the firm has recovered its investment within two years. In this case, two years is the payback period of the investment.

The  payback period rule  for making investment decisions is simple. A particular cutoff date, say two years, is selected. All investment projects that have payback periods of two years or less are accepted, and all of those that pay off in more than two years—if at all—are rejected.


There are at least three problems with payback. To illustrate the first two problems, we consider the three projects in Table 5.1. All three projects have the same three-year payback period, so they should all be equally attractive—right?

Actually, they are not equally attractive, as can be seen by a comparison of different pairs of projects.

Problem 1: Timing of Cash Flows within the Payback Period  Let us compare Project A with Project B. In Years 1 through 3, the cash flows of Project A rise from $20 to $50, while the cash flows of Project B fall from $50 to $20. Because the large cash flow of $50 comes earlier with Project B, its net present value must be higher. Nevertheless, we just saw that the payback periods of the two projects are identical. Thus, a problem with the payback method is that it does not consider the timing of the cash flows within the payback period. This example shows that the payback method is inferior to NPV because, as we pointed out earlier, the NPV method discounts the cash flows properly.

Problem 2: Payments after the Payback Period  Now consider Projects B and C, which have identical cash flows within the payback period. However, Project C is clearly preferred because it has a cash flow of $100 in the fourth year. Thus, another problem with the payback method is that it ignores all cash flows occurring after the payback period. Because of the short-term orientation of the payback method, some valuable long-term projects are likely to be rejected. The NPV method does not have this flaw because, as we pointed out earlier, this method uses all the cash flows of the project.

Problem 3: Arbitrary Standard for Payback Period  We do not need to refer to Table 5.1 when considering a third problem with the payback method. Capital markets help us estimate the discount rate used in the NPV method. The riskless rate, perhaps proxied by the yield on a U.S. Treasury instrument, would be the appropriate rate for a riskless investment; a higher rate should be used for risky projects. Later chapters of this Page 140textbook show how to use historical returns in the capital markets to estimate the discount rate for a risky project. However, there is no comparable guide for choosing the payback cutoff date, so the choice is somewhat arbitrary.

Table 5.1 Expected Cash Flows for Projects A through C ($)

1      20      50      50
2      30      30      30
3      50      20      20
4      60      60   $100
Payback period (years)        3        3        3
NPV    21.5    26.3    53.6

To illustrate the payback period problems, consider Table 5.1. Suppose the expected return on comparable risky projects is 10 percent. Then we would use a discount rate of 10 percent for these projects. If so, the NPV would be $21.5, $26.3, and $53.6 for A, B, and C respectively. When using the payback period, these projects are equal to one another (i.e. they each have a payback period of 3 years). However, when considering all cash flows, B has a higher NPV than A because of the timing of cash flows within the payback period. And C has the highest NPV because of the $100 cash flow after the payback period.


The payback method is often used by large, sophisticated companies when making relatively small decisions. The decision to build a small warehouse, for example, or to pay for a tune-up for a truck is the sort of decision that is often made by lower-level management. Typically, a manager might reason that a tune-up would cost, say, $200, and if it saved $120 each year in reduced fuel costs, it would pay for itself in less than two years. On such a basis the decision would be made.

Although the treasurer of the company might not have made the decision in the same way, the company endorses such decision making. Why would upper management condone or even encourage such retrograde activity in its employees? One answer would be that it is easy to make decisions using payback. Multiply the tune-up decision into 50 such decisions a month, and the appeal of this simple method becomes clearer.

The payback method also has some desirable features for managerial control. Just as important as the investment decision itself is the company’s ability to evaluate the manager’s decision-making ability. Under the NPV method, a long time may pass before one decides whether a decision was correct. With the payback method we know in two years whether the manager’s assessment of the cash flows was correct.

It has also been suggested that firms with good investment opportunities but no available cash may justifiably use payback. For example, the payback method could be used by small, privately held firms with good growth prospects but limited access to the capital markets. Quick cash recovery increases the reinvestment possibilities for such firms.

Finally, practitioners often argue that standard academic criticisms of the payback method overstate any real-world problems with the method. For example, textbooks typically make fun of payback by positing a project with low cash inflows in the early years but a huge cash inflow right after the payback cutoff date. This project is likely to be rejected under the payback method, though its acceptance would, in truth, benefit the firm. Project C in our Table 5.1 is an example of such a project. Practitioners point out that the pattern of cash flows in these textbook examples is much too stylized to mirror the real world. In fact, a number of executives have told us that for the overwhelming majority of real-world projects, both payback and NPV lead to the same decision. In addition, these executives indicate that if an investment-like Project C were encountered in the real world, decision makers would almost certainly make ad hoc adjustments to the payback rule so that the project would be accepted.

Notwithstanding all of the preceding rationale, it is not surprising to discover that as the decisions grow in importance, which is to say when firms look at bigger projects, NPV becomes the order of the day. When questions of controlling and evaluating the manager become less important than making the right investment decision, payback is used less frequently. For big-ticket decisions, such as whether or not to buy a machine, build a factory, or acquire a company, the payback method is seldom used.Page 141


The payback method differs from NPV and is therefore conceptually wrong. With its arbitrary cutoff date and its blindness to cash flows after that date, it can lead to some flagrantly foolish decisions if used too literally. Nevertheless, because of its simplicity, as well as its other mentioned advantages, companies often use it as a screen for making the myriad of minor investment decisions they continually face.

Although this means that you should be wary of trying to change approaches such as the payback method when you encounter them in companies, you should probably be careful not to accept the sloppy financial thinking they represent. After this course, you would do your company a disservice if you used payback instead of NPV when you had a choice.

5.3 The Discounted Payback Period Method

Aware of the pitfalls of payback, some decision makers use a variant called the  discounted payback period method . Under this approach, we first discount the cash flows. Then we ask how long it takes for the discounted cash flows to equal the initial investment.

For example, suppose that the discount rate is 10 percent and the cash flows on a project are given by:

(−$100, $50, $50, $20)

This investment has a payback period of two years because the investment is paid back in that time.

To compute the project’s discounted payback period, we first discount each of the cash flows at the 10 percent rate. These discounted cash flows are:

[−$100, $50/1.1, $50/(1.1)2, $20/(1.1)3] = (−$100, $45.45, $41.32, $15.03)

The discounted payback period of the original investment is simply the payback period for these discounted cash flows. The payback period for the discounted cash flows is slightly less than three years because the discounted cash flows over the three years are $101.80 (=$45.45 + 41.32 1 15.03). As long as the cash flows and discount rate are positive, the discounted payback period will never be smaller than the payback period because discounting reduces the value of the cash flows.

At first glance discounted payback may seem like an attractive alternative, but on closer inspection we see that it has some of the same major flaws as payback. Like payback, discounted payback first requires us to choose an arbitrary cutoff period, and then it ignores all cash flows after that date.

If we have already gone to the trouble of discounting the cash flows, we might just as well add up all the discounted cash flows and use NPV to make the decision. Although discounted payback looks a bit like NPV, it is just a poor compromise between the payback method and NPV.

5.4 The Internal Rate of Return

Now we come to the most important alternative to the NPV method: The internal rate of return, universally known as the IRR. The IRR is about as close as you can get to the NPV without actually being the NPV. The basic rationale behind the IRR method is that it provides a single number summarizing the merits of a project. That number does not depend on the interest rate prevailing in the capital market. That is why it is called the internal rate Page 142of return; the number is internal or intrinsic to the project and does not depend on anything except the cash flows of the project.

Figure 5.2  Cash Flows for a Simple Project

For example, consider the simple project (−$100, $110) in Figure 5.2. For a given rate, the net present value of this project can be described as:

where R is the discount rate. What must the discount rate be to make the NPV of the project equal to zero?

We begin by using an arbitrary discount rate of .08, which yields:

Because the NPV in this equation is positive, we now try a higher discount rate, such as .12. This yields:

Because the NPV in this equation is negative, we try lowering the discount rate to .10. This yields:

This trial-and-error procedure tells us that the NPV of the project is zero when R equals 10 percent.1 Thus, we say that 10 percent is the project’s  internal rate of return  (IRR). In general, the IRR is the rate that causes the NPV of the project to be zero. The implication of this exercise is very simple. The firm should be equally willing to accept or reject the project if the discount rate is 10 percent. The firm should accept the project if the discount rate is below 10 percent. The firm should reject the project if the discount rate is above 10 percent.

The general investment rule is clear:

Accept the project if the IRR is greater than the discount rate. Reject the project if the IRR is less than the discount rate.

Page 0143FIGURE 5.3  Cash Flows for a More Complex Project

We refer to this as the basic IRR rule. Now we can try the more complicated example (−$200, $100, $100, $100) in Figure 5.3.

As we did previously, let’s use trial and error to calculate the internal rate of return. We try 20 percent and 30 percent, yielding the following:

Discount RateNPV

After much more trial and error, we find that the NPV of the project is zero when the discount rate is 23.38 percent. Thus, the IRR is 23.38 percent. With a 20 percent discount rate, the NPV is positive and we would accept it. However, if the discount rate were 30 percent, we would reject it.

Algebraically, IRR is the unknown in the following equation:2

Figure 5.4 illustrates what the IRR of a project means. The figure plots the NPV as a function of the discount rate. The curve crosses the horizontal axis at the IRR of 23.38 percent because this is where the NPV equals zero.

It should also be clear that the NPV is positive for discount rates below the IRR and negative for discount rates above the IRR. If we accept projects like this one when the discount rate is less than the IRR, we will be accepting positive NPV projects. Thus, the IRR rule coincides exactly with the NPV rule.

If this were all there were to it, the IRR rule would always coincide with the NPV rule. But the world of finance is not so kind. Unfortunately, the IRR rule and the NPV rule are consistent with each other only for examples like the one just discussed. Several problems with the IRR approach occur in more complicated situations, a topic to be examined in the next section.

The IRR in the previous example was computed through trial and error. This laborious process can be averted through spreadsheets. A nearby Spreadsheet Applications box shows how.

Page 0144Figure 5.4  Net Present Value (NPV) and Discount Rates for a More Complex Project


Calculating IRRs with a Spreadsheet

Because IRRs are so tedious to calculate by hand, financial calculators and, especially, spreadsheets are generally used. The procedures used by various financial calculators are too different for us to illustrate here, so we will focus on using a spreadsheet. As the following example illustrates, using a spreadsheet is very easy.

Page 0145

5.5 Problems with the IRR Approach


An  independent project  is one whose acceptance or rejection is independent of the acceptance or rejection of other projects. For example, imagine that McDonald’s is considering putting a hamburger outlet on a remote island. Acceptance or rejection of this unit is likely to be unrelated to the acceptance or rejection of any other restaurant in its system. The remoteness of the outlet in question ensures that it will not pull sales away from other outlets.

Now consider the other extreme,  mutually exclusive investments . What does it mean for two projects, A and B, to be mutually exclusive? You can accept A or you can accept B or you can reject both of them, but you cannot accept both of them. For example, A might be a decision to build an apartment house on a corner lot that you own, and B might be a decision to build a movie theater on the same lot.

We now present two general problems with the IRR approach that affect both independent and mutually exclusive projects. Then we deal with two problems affecting mutually exclusive projects only.


We begin our discussion with Project A, which has the following cash flows:

(−$100, $130)

The IRR for Project A is 30 percent. Table 5.2 provides other relevant information about the project. The relationship between NPV and the discount rate is shown for this project in Figure 5.5. As you can see, the NPV declines as the discount rate rises.

Problem 1: Investing or Financing?  Now consider Project B, with cash flows of:

($100, −$130)

These cash flows are exactly the reverse of the flows for Project A. In Project B, the firm receives funds first and then pays out funds later. While unusual, projects of this type do exist. For example, consider a corporation conducting a seminar where the participants pay in advance. Because large expenses are frequently incurred at the seminar date, cash inflows precede cash outflows.

Table 5.2 The Internal Rate of Return and Net Present Value

Project AProject BProject C
Cash flows−$100$130 $100−$130 −$100$230−$132
IRR30%  30%  10% and 20%  
NPV @10%$ 18.2  −$ 18.2  0  
Accept if market rate>30%  <30%  >10% but <20%  
Financing or investingInvesting  Financing  Mixture  

Page 0146FIGURE 5.5  Net Present Value and Discount Rates for Projects AB, and C

Consider our trial-and-error method to calculate IRR:

As with Project A, the internal rate of return is 30 percent. However, notice that the net present value is negative when the discount rate is below 30 percent. Conversely, the net present value is positive when the discount rate is above 30 percent. The decision rule is exactly the opposite of our previous result. For this type of project, the following rule applies:

Accept the project when the IRR is less than the discount rate. Reject the project when the IRR is greater than the discount rate.

This unusual decision rule follows from the graph of Project B in Figure 5.5. The curve is upward sloping, implying that NPV is positively related to the discount rate.

The graph makes intuitive sense. Suppose the firm wants to obtain $100 immediately. It can either (1) accept Project B or (2) borrow $100 from a bank. Thus, the project is actually a substitute for borrowing. In fact, because the IRR is 30 percent, taking on Project B is equivalent to borrowing at 30 percent. If the firm can borrow from a bank at, say, only 25 percent, it should reject the project. However, if a firm can borrow from a bank only at, say, 35 percent, it should accept the project. Thus Project B will be accepted if and only if the discount rate is above the IRR.3

This should be contrasted with Project A. If the firm has $100 cash to invest, it can either (1) accept Project A or (2) lend $100 to the bank. The project is actually a substitute for lending. In fact, because the IRR is 30 percent, taking on Project A is tantamount to lending at 30 percent. The firm should accept Project A if the lending rate is below 30 percent. Conversely, the firm should reject Project A if the lending rate is above 30 percent.

Page 147Because the firm initially pays out money with Project A but initially receives money with Project B, we refer to Project A as an investing type project and Project B as a financing type project. Investing type projects are the norm. Because the IRR rule is reversed for financing type projects, be careful when using it with this type of project.

Problem 2: Multiple Rates of Return  Suppose the cash flows from a project are:

(−$100, $230, −$132)

Because this project has a negative cash flow, a positive cash flow, and another negative cash flow, we say that the project’s cash flows exhibit two changes of sign, or “flipflops.” Although this pattern of cash flows might look a bit strange at first, many projects require outflows of cash after some inflows. An example would be a strip-mining project. The first stage in such a project is the initial investment in excavating the mine. Profits from operating the mine are received in the second stage. The third stage involves a further investment to reclaim the land and satisfy the requirements of environmental protection legislation. Cash flows are negative at this stage.

Projects financed by lease arrangements may produce a similar pattern of cash flows. Leases often provide substantial tax subsidies, generating cash inflows after an initial investment. However, these subsidies decline over time, frequently leading to negative cash flows in later years. (The details of leasing will be discussed in a later chapter.)

It is easy to verify that this project has not one but two IRRs, 10 percent and 20 percent.4 In a case like this, the IRR does not make any sense. What IRR are we to use—10 percent or 20 percent? Because there is no good reason to use one over the other, IRR simply cannot be used here.

Why does this project have multiple rates of return? Project C generates multiple internal rates of return because both an inflow and an outflow occur after the initial investment. In general, these flip-flops or changes in sign produce multiple IRRs. In theory, a cash flow stream with K changes in sign can have up to K sensible internal rates of return (IRRs above -100 percent). Therefore, because Project C has two changes in sign, it can have as many as two IRRs. As we pointed out, projects whose cash flows change sign repeatedly can occur in the real world.

NPV Rule  Of course, we should not be too worried about multiple rates of return. After all, we can always fall back on the NPV rule. Figure 5.5 plots the NPV of Project C (-$100, $230, -$132) as a function of the discount rate. As the figure shows, the NPV is zero at both 10 percent and 20 percent and negative outside the range. Thus, the NPV rule tells us to accept the project if the appropriate discount rate is between 10 percent and 20 percent. The project should be rejected if the discount rate lies outside this range.

Page 148Modified IRR  As an alternative to NPV, we now introduce the  modified IRR (MIRR)  method, which handles the multiple IRR problem by combining cash flows until only one change in sign remains. To see how it works, consider Project C again. With a discount rate of, say, 14 percent, the value of the last cash flow, -$132, is:

−$132 /1.14 = −$115.79

as of Date 1. Because $230 is already received at that time, the “adjusted” cash flow at Date 1 is $114.21 (=$230 – 115.79). Thus, the MIRR approach produces the following two cash flows for the project:

(−$100, $114.21)

Note that by discounting and then combining cash flows, we are left with only one change in sign. The IRR rule can now be applied. The IRR of these two cash flows is 14.21 percent, implying that the project should be accepted given our assumed discount rate of 14 percent.

Of course, Project C is relatively simple to begin with: It has only three cash flows and two changes in sign. However, the same procedure can easily be applied to more complex projects—that is, just keep discounting and combining the later cash flows until only one change of sign remains.

Although this adjustment does correct for multiple IRRs, it appears, at least to us, to violate the “spirit” of the IRR approach. As stated earlier, the basic rationale behind the IRR method is that it provides a single number summarizing the merits of a project. That number does not depend on the discount rate. In fact, that is why it is called the internal rate of return: The number is internal, or intrinsic, to the project and does not depend on anything except the project’s cash flows. By contrast, MIRR is clearly a function of the discount rate. However, a firm using this adjustment will avoid the multiple IRR problem, just as a firm using the NPV rule will avoid it.5

The Guarantee against Multiple IRRs  If the first cash flow of a project is negative (because it is the initial investment) and if all of the remaining flows are positive, there can be only a single, unique IRR, no matter how many periods the project lasts. This is easy to understand by using the concept of the time value of money. For example, it is simple to verify that Project A in Table 5.2 has an IRR of 30 percent because using a 30 percent discount rate gives:

Page 149How do we know that this is the only IRR? Suppose we were to try a discount rate greater than 30 percent. In computing the NPV, changing the discount rate does not change the value of the initial cash flow of -$100 because that cash flow is not discounted. Raising the discount rate can only lower the present value of the future cash flows. In other words, because the NPV is zero at 30 percent, any increase in the rate will push the NPV into the negative range. Similarly, if we try a discount rate of less than 30 percent, the overall NPV of the project will be positive. Though this example has only one positive flow, the above reasoning still implies a single, unique IRR if there are many inflows (but no outflows) after the initial investment.

If the initial cash flow is positive—and if all of the remaining flows are negative— there can only be a single, unique IRR. This result follows from similar reasoning. Both these cases have only one change of sign or flip-flop in the cash flows. Thus, we are safe from multiple IRRs whenever there is only one sign change in the cash flows.

General Rules  The following chart summarizes our rules:

FlowsNumber of IRRsIRR CriterionNPV Criterion
First cash flow is negative and1Accept if IRR > R.Accept if NPV > 0.
  all remaining cash flows are positive. Reject if IRR < R.Reject if NPV < 0.
First cash flow is positive and1Accept if IRR < R.Accept if NPV > 0.
  all remaining cash flows are negative. Reject if IRR > R.Reject if NPV < 0.
Some cash flows after first areMay be moreNo valid IRR.Accept if NPV > 0.
  positive and some cash flows after first are negative.than 1. Reject if NPV < 0.

Note that the NPV criterion is the same for each of the three cases. In other words, NPV analysis is always appropriate. Conversely, the IRR can be used only in certain cases. When it comes to NPV, the preacher’s words, “You just can’t lose with the stuff I use,” clearly apply.


As mentioned earlier, two or more projects are mutually exclusive if the firm can accept only one of them. We now present two problems dealing with the application of the IRR approach to mutually exclusive projects. These two problems are quite similar, though logically distinct.

The Scale Problem  A professor we know motivates class discussions of this topic with this statement: “Students, I am prepared to let one of you choose between two mutually exclusive ‘business’ propositions. Opportunity 1—You give me $1 now and I’ll give you $1.50 back at the end of the class period. Opportunity 2—You give me $10 and I’ll give you $11 back at the end of the class period. You can choose only one of the two opportunities. And you cannot choose either opportunity more than once. I’ll pick the first volunteer.”

Page 150Which would you choose? The correct answer is Opportunity 2.6 To see this, look at the following chart:

Cash Flow at Beginning of ClassCash Flow at End of Class (90 Minutes Later)NPV 7IRR
Opportunity 1−$ 1+$ 1.50$ .5050%
Opportunity 2−10+ 11.001.0010

As we have stressed earlier in the text, one should choose the opportunity with the highest NPV. This is Opportunity 2 in the example. Or, as one of the professor’s students explained it, “I’m bigger than the professor, so I know I’ll get my money back. And I have $10 in my pocket right now so I can choose either opportunity. At the end of the class, I’ll be able to buy one song on iTunes with Opportunity 2 and still have my original investment, safe and sound. The profit on Opportunity 1 pays for only one half of a song.”

This business proposition illustrates a defect with the internal rate of return criterion. The basic IRR rule indicates the selection of Opportunity 1 because the IRR is 50 percent. The IRR is only 10 percent for Opportunity 2.

Where does IRR go wrong? The problem with IRR is that it ignores issues of scale. Although Opportunity 1 has a greater IRR, the investment is much smaller. In other words, the high percentage return on Opportunity 1 is more than offset by the ability to earn at least a decent return8 on a much bigger investment under Opportunity 2.

Because IRR seems to be misguided here, can we adjust or correct it? We illustrate how in the next example.



NPV versus IRR  Stanley Jaffe and Sherry Lansing have just purchased the rights to Corporate Finance: The Motion Picture. They will produce this major motion picture on either a small budget or a big budget. Here are the estimated cash flows:

Cash Flow at Date 0Cash Flow at Date 1NPV @25%IRR
Small budget−$10 million$40 million$22 million300%
Large budget−25 million65 million27 million160

Because of high risk, a 25 percent discount rate is considered appropriate. Sherry wants to adopt the large budget because the NPV is higher. Stanley wants to adopt the small budget because the IRR is higher. Who is right?

Page 151For the reasons espoused in the classroom example, NPV is correct. Hence Sherry is right. Howwever, Stanley is very stubborn where IRR is concerned. How can Sherry justify the large budget to Stanley using the IRR approach?

This is where incremental IRR comes in. Sherry calculates the incremental cash flows from choosing the large budget instead of the small budget as follows:

Cash Flow at Date 0 (in $ millions)Cash Flow at Date 1 (in $ millions)
Incremental cash flows from choosing large budget instead of small budget−$25 − (-10) = −$15$65 − 40 = $25

This chart shows that the incremental cash flows are -$15 million at Date 0 and $25 million at Date 1. Sherry calculates incremental IRR as follows:

Formula for Calculating the Incremental IRR:

IRR equals 66.67 percent in this equation, implying that the incremental IRR is 66.67 percent. Incremental IRR is the IRR on the incremental investment from choosing the large project instead of the small project.

In addition, we can calculate the NPV of the incremental cash flows:

NPV of Incremental Cash Flows:

We know the small-budget picture would be acceptable as an independent project because its NPV is positive. We want to know whether it is beneficial to invest an additional $15 million to make the large-budget picture instead of the small-budget picture. In other words, is it beneficial to invest an additional $15 million to receive an additional $25 million next year? First, our calculations show the NPV on the incremental investment to be positive. Second, the incremental IRR of 66.67 percent is higher than the discount rate of 25 percent. For both reasons, the incremental investment can be justified, so the large-budget movie should be made. The second reason is what Stanley needed to hear to be convinced.

In review, we can handle this example (or any mutually exclusive example) in one of three ways:

1. Compare the NPVs of the two choices. The NPV of the large-budget picture is greater than the NPV of the small-budget picture. That is, $27 million is greater than $22 million.

2. Calculate the incremental NPV from making the large-budget picture instead of the small-budget picture. Because the incremental NPV equals $5 million, we choose the large-budget picture.

3. Compare the incremental IRR to the discount rate. Because the incremental IRR is 66.67 percent and the discount rate is 25 percent, we take the large-budget picture.

Page 152All three approaches always give the same decision. However, we must not compare the IRRs of the two pictures. If we did, we would make the wrong choice. That is, we would accept the small-budget picture.

Although students frequently think that problems of scale are relatively unimportant, the truth is just the opposite. No real-world project comes in one clear-cut size. Rather, the firm has to determine the best size for the project. The movie budget of $25 million is not fixed in stone. Perhaps an extra $1 million to hire a bigger star or to film at a better location will increase the movie’s gross. Similarly, an industrial firm must decide whether it wants a warehouse of, say, 500,000 square feet or 600,000 square feet. And, earlier in the chapter, we imagined McDonald’s opening an outlet on a remote island. If it does this, it must decide how big the outlet should be. For almost any project, someone in the firm has to decide on its size, implying that problems of scale abound in the real world.

One final note here. Students often ask which project should be subtracted from the other in calculating incremental flows. Notice that we are subtracting the smaller project’s cash flows from the bigger project’s cash flows. This leaves an outflow at Date 0. We then use the basic IRR rule on the incremental flows.9

The Timing Problem  Next we illustrate another, somewhat similar problem with the IRR approach to evaluating mutually exclusive projects.



Mutually Exclusive Investments  Suppose that the Kaufold Corporation has two alternative uses for a warehouse. It can store toxic waste containers (Investment A) or electronic equipment (Investment B). The cash flows are as follows:

Cash Flow at YearNPV
Year:0123@ 0%@10%@15%IRR
Investment A−$10,000$10,000$1,000$1,000$2,000$669$10916.04%
Investment B  −10,000  $1,000 $1,00012,000  4,000  751−48412.94

We find that the NPV of Investment B is higher with low discount rates, and the NPV of Investment A is higher with high discount rates. This is not surprising if you look closely at the cash flow patterns. The cash flows of A occur early, whereas the cash flows of B occur later. If we assume a high discount rate, we favor Investment A because we are implicitly assuming that the early cash flow (for example, $10,000 in Year 1) can be reinvested at that rate. Because most of Investment B’s cash flows occur in Year 3, B’s value is relatively high with low discount rates.

The patterns of cash flow for both projects appear in Figure 5.6. Project A has an NPV of $2,000 at a discount rate of zero. This is calculated by simply adding up the cash flows without discounting them. Project B has an NPV of $4,000 at the zero rate. However, the NPV of Project B declines more rapidly as the discount rate increases than does the NPV of Project A. As we mentioned, this occurs because the cash flows of B occur later. Both projects have the same NPV at a discount rate of 10.55 percent. The IRR for a project is Page 153the rate at which the NPV equals zero. Because the NPV of B declines more rapidly, B actually has a lower IRR.

Figure 5.6  Net Present Value and the Internal Rate of Return for Mutually Exclusive Projects

As with the movie example, we can select the better project with one of three different methods:

1. Compare NPVs of the two projects. Figure 5.6 aids our decision. If the discount rate is below 10.55 percent, we should choose Project B because B has a higher NPV. If the rate is above 10.55 percent, we should choose Project A because A has a higher NPV.

2. Compare incremental IRR to discount rate. Method 1 employed NPV. Another way of determining whether A or B is a better project is to subtract the cash flows of A from the cash flows of B and then to calculate the IRR. This is the incremental IRR approach we spoke of earlier.

Here are the incremental cash flows:

 NPV of Incremental Cash Flows
Year:0123Incremental IRR@ 0%@10%@15%
BA0− $9,0000$11,00010.55%$2,000$83− $593

This chart shows that the incremental IRR is 10.55 percent. In other words, the NPV on the incremental investment is zero when the discount rate is 10.55 percent. Thus, if the relevant discount rate is below 10.55 percent, Project B is preferred to Project A. If the relevant discount rate is above 10.55 percent, Project A is preferred to Project B.

Figure 5.6 shows that the NPVs of the two projects are equal when the discount rate is 10.55 percent. In other words, the crossover rate in the figure is 10.55. The incremental cash flows chart shows that the incremental IRR is also 10.55 percent. It is not a coincidence that the crossover rate and the incremental IRR are the same; this equality must always hold. The incremental IRR is the rate that causes the incremental cash flows to have zero NPV. The incremental cash flows have zero NPV when the two projects have the same NPV.Page 154

3. Calculate NPV on incremental cash flows. Finally, we could calculate the NPV on the incremental cash flows. The chart that appears with the previous method displays these NPVs. We find that the incremental NPV is positive when the discount rate is either 0 percent or 10 percent. The incremental NPV is negative if the discount rate is 15 percent. If the NPV is positive on the incremental flows, we should choose B. If the NPV is negative, we should choose A.

In summary, the same decision is reached whether we (1) compare the NPVs of the two projects, (2) compare the incremental IRR to the relevant discount rate, or (3) examine the NPV of the incremental cash flows. However, as mentioned earlier, we should not compare the IRR of Project A with the IRR of Project B.

We suggested earlier that we should subtract the cash flows of the smaller project from the cash flows of the bigger project. What do we do here when the two projects have the same initial investment? Our suggestion in this case is to perform the subtraction so that the first nonzero cash flow is negative. In the Kaufold Corp. example we achieved this by subtracting A from B. In this way, we can still use the basic IRR rule for evaluating cash flows.

The preceding examples illustrate problems with the IRR approach in evaluating mutually exclusive projects. Both the professor-student example and the motion picture example illustrate the problem that arises when mutually exclusive projects have different initial investments. The Kaufold Corp. example illustrates the problem that arises when mutually exclusive projects have different cash flow timing. When working with mutually exclusive projects, it is not necessary to determine whether it is the scale problem or the timing problem that exists. Very likely both occur in any real-world situation. Instead, the practitioner should simply use either an incremental IRR or an NPV approach.


IRR probably survives because it fills a need that NPV does not. People seem to want a rule that summarizes the information about a project in a single rate of return. This single rate gives people a simple way of discussing projects. For example, one manager in a firm might say to another, “Remodeling the north wing has a 20 percent IRR.”

To their credit, however, companies that employ the IRR approach seem to understand its deficiencies. For example, companies frequently restrict managerial projections of cash flows to be negative at the beginning and strictly positive later. Perhaps, then, both the ability of the IRR approach to capture a complex investment project in a single number, and the ease of communicating that number explain the survival of the IRR.


To test your knowledge, consider the following two statements:

1. You must know the discount rate to compute the NPV of a project, but you compute the IRR without referring to the discount rate.

2. Hence, the IRR rule is easier to apply than the NPV rule because you don’t use the discount rate when applying IRR.

The first statement is true. The discount rate is needed to compute NPV. The IRR is computed by solving for the rate where the NPV is zero. No mention is made of the discount rate in the mere computation. However, the second statement is false. To apply IRR, you must compare the internal rate of return with the discount rate. Thus the discount rate is needed for making a decision under either the NPV or IRR approach.Page 155

5.6 The Profitability Index

Another method used to evaluate projects is called the profitability index. It is the ratio of the present value of the future expected cash flows after initial investment divided by the amount of the initial investment. The profitability index can be represented as:



Profitability Index   Hiram Finnegan Inc. (HFI) applies a 12 percent discount rate to two investment opportunities.

              Cash Flows               ($000,000)                   PV @ 12% of Cash      Flows Subsequent     to Initial Investment             ($000,000)
ProjectC0C1C2Profitability      IndexNPV @12% ($000,000)


The profitability index is calculated for Project 1 as follows. The present value of the cash flows after the initial investment is:

The profitability index is obtained by dividing this result by the initial investment of $20. This yields:

Application of the Profitability Index How do we use the profitability index? We consider three situations:

1. Independent projects: Assume that HFI’s two projects are independent. According to the NPV rule, both projects should be accepted because NPV is positive in each case. The profitability index (PI) is greater than 1 whenever the NPV is positive. Thus, the PI decision rule is:

1. •  Accept an independent project if PI > 1.

2. •  Reject it if PI < 1.

2. Mutually exclusive projects: Let us now assume that HFI can only accept one of its two projects. NPV analysis says accept Project 1 because this project has the bigger NPV. Because Project 2 has the higher PI, the profitability index leads to the wrong selection.

Page 156For mutually exclusive projects, the profitability index suffers from the scale problem that IRR also suffers from. Project 2 is smaller than Project 1. Because the PI is a ratio, it ignores Project 1’s larger investment. Thus, like IRR, PI ignores differences of scale for mutually exclusive projects.

However, like IRR, the flaw with the PI approach can be corrected using incremental analysis. We write the incremental cash flows after subtracting Project 2 from Project 1 as follows:

              Cash Flows               ($000,000)                   PV @ 12% of Cash      Flows Subsequent     to Initial Investment             ($000,000)
ProjectC0C1C2Profitability      IndexNPV @12% ($000,000)

Because the profitability index on the incremental cash flows is greater than 1.0, we should choose the bigger project—that is, Project 1. This is the same decision we get with the NPV approach.

3. Capital rationing: The first two cases implicitly assumed that HFI could always attract enough capital to make any profitable investments. Now consider the case when the firm does not have enough capital to fund all positive NPV projects. This is the case of capital rationing.

Imagine that the firm has a third project, as well as the first two. Project 3 has the following cash flows:

              Cash Flows               ($000,000)                   PV @ 12% of Cash      Flows Subsequent     to Initial Investment             ($000,000)
ProjectC0C1C2Profitability      IndexNPV @12% ($000,000)

Further, imagine that (1) the projects of Hiram Finnegan Inc. are independent, but (2) the firm has only $20 million to invest. Because Project 1 has an initial investment of $20 million, the firm cannot select both this project and another one. Conversely, because Projects 2 and 3 have initial investments of $10 million each, both these projects can be chosen. In other words, the cash constraint forces the firm to choose either Project 1 or Projects 2 and 3.

What should the firm do? Individually, Projects 2 and 3 have lower NPVs than Project 1 has. However, when the NPVs of Projects 2 and 3 are added together, the sum is higher than the NPV of Project 1. Thus, common sense dictates that Projects 2 and 3 should be accepted.

What does our conclusion have to say about the NPV rule or the PI rule? In the case of limited funds, we cannot rank projects according to their NPVs. Instead we should rank them according to the ratio of present value to initial investment. This is the PI rule. Both Project 2 and Project 3 have higher PI ratios than does Project 1. Thus they should be ranked ahead of Project 1 when capital is rationed.

Page 157The usefulness of the profitability index under capital rationing can be explained in military terms. The Pentagon speaks highly of a weapon with a lot of “bang for the buck.” In capital budgeting, the profitability index measures the bang (the dollar return) for the buck invested. Hence it is useful for capital rationing.

It should be noted that the profitability index does not work if funds are also limited beyond the initial time period. For example, if heavy cash outflows elsewhere in the firm were to occur at Date 1, Project 3, which also has a cash outflow at Date 1, might need to be rejected. In other words, the profitability index cannot handle capital rationing over multiple time periods.

In addition, what economists term indivisibilities may reduce the effectiveness of the PI rule. Imagine that HFI has $30 million available for capital investment, not just $20 million. The firm now has enough cash for Projects 1 and 2. Because the sum of the NPVs of these two projects is greater than the sum of the NPVs of Projects 2 and 3, the firm would be better served by accepting Projects 1 and 2. But because Projects 2 and 3 still have the highest profitability indexes, the PI rule now leads to the wrong decision. Why does the PI rule lead us astray here? The key is that Projects 1 and 2 use up all of the $30 million, whereas Projects 2 and 3 have a combined initial investment of only $20 million (= $10 + 10). If Projects 2 and 3 are accepted, the remaining $10 million must be left in the bank.

This situation points out that care should be exercised when using the profitability index in the real world. Nevertheless, while not perfect, the profitability index goes a long way toward handling capital rationing.

5.7 The Practice of Capital Budgeting

So far this chapter has asked “Which capital budgeting methods should companies be using?” An equally important question is this: Which methods are companies using? Table 5.3 helps answer this question. As can be seen from the table, approximately three- quarters of U.S. and Canadian companies use the IRR and NPV methods. This is not surprising, given the theoretical advantages of these approaches. Over half of these companies use the payback method, a rather surprising result given the conceptual problems with this approach. And while discounted payback represents a theoretical improvement over regular payback, the usage here is far less. Perhaps companies are attracted to the user-friendly nature of payback. In addition, the flaws of this approach, as mentioned in the current chapter, may be relatively easy to correct. For example, while the payback method ignores Page 158all cash flows after the payback period, an alert manager can make ad hoc adjustments for a project with back-loaded cash flows.

Table 5.3 Percentage of CFOs Who Always or Almost Always Use a Given Technique

% Always or Almost Always
Internal rate of return (IRR)75.6%
Net present value (NPV)74.9
Payback method56.7
Discounted payback29.5
Profitability index11.9

SOURCE: Adapted from Figure 2 from John R. Graham and Campbell R. Harvey, “The Theory and Practice of Corporate Finance: Evidence from the Field,” Journal of Financial Economics 60 (2001). Based on a survey of 392 CFOs.

Capital expenditures by individual corporations can add up to enormous sums for the economy as a whole. For example, in 2014, ExxonMobil announced that it expected to make about $39.8 billion in capital outlays during the year, down 6 percent from the record $42.5 billion in 2013. The company further indicated that it expected to spend an average of $37 billion per year through 2017. About the same time, Chevron announced that its capital budget for 2014 would be $39.8 billion, down $2 billion from the previous year, and ConocoPhillips announced a capital expenditure budget of $16.7 billion for 2014. Other companies with large capital spending budgets in 2014 were Intel, which projected capital spending of about $11 billion, and Samsung Electronics, which projected capital spending of about $11.5 billion.

Large-scale capital spending is often an industrywide occurrence. For example, in 2014, capital spending in the semiconductor industry was expected to reach $60.9 billion. This tidy sum represented a 5.5 percent increase over industry capital spending in 2013.

According to information released by the U.S. Census Bureau in 2013, capital investment for the economy as a whole was $1.090 trillion in 2009, $1.106 trillion in 2010, and $1.226 trillion in 2011. The totals for the three years therefore equaled approximately $3.422 trillion! Given the sums at stake, it is not too surprising that successful corporations carefully analyze capital expenditures.

One might expect the capital budgeting methods of large firms to be more sophisticated than the methods of small firms. After all, large firms have the financial resources to hire more sophisticated employees. Table 5.4 provides some support for this idea. Here firms indicate frequency of use of the various capital budgeting methods on a scale of 0 (never) to 4 (always). Both the IRR and NPV methods are used more frequently, and payback less frequently, in large firms than in small firms. Conversely, large and small firms employ the last two approaches about equally.

The use of quantitative techniques in capital budgeting varies with the industry. As one would imagine, firms that are better able to estimate cash flows are more likely to use NPV. For example, estimation of cash flow in certain aspects of the oil business is quite feasible. Because of this, energy-related firms were among the first to use NPV analysis. Conversely, the cash flows in the motion picture business are very hard to project. The grosses of great hits like Spiderman, Harry Potter, and Star Wars were far, far greater than anyone imagined. The big failures like Alamo and Waterworld were unexpected as well. Because of this, NPV analysis is frowned upon in the movie business.

Table 5.4 Frequency of Use of Various Capital Budgeting Methods

Large FirmsSmall Firms
Internal rate of return (IRR)3.412.87
Net present value (NPV)3.422.83
Payback method2.252.72
Discounted payback1.551.58
Profitability index  .75  .78

Firms indicate frequency of use on a scale from 0 (never) to 4 (always). Numbers in table are averages across respondents. SOURCE: Adapted from Table 2 from Graham and Harvey (2001), op. cit.

Page 159How does Hollywood perform capital budgeting? The information that a studio uses to accept or reject a movie idea comes from the pitch. An independent movie producer schedules an extremely brief meeting with a studio to pitch his or her idea for a movie. Consider the following four paragraphs of quotes concerning the pitch from the thoroughly delightful book Reel Power:10

“They [studio executives] don’t want to know too much,” says Ron Simpson. “They want to know concept… . They want to know what the three-liner is, because they want it to suggest the ad campaign. They want a title… . They don’t want to hear any esoterica. And if the meeting lasts more than five minutes, they’re probably not going to do the project.”

“A guy comes in and says this is my idea: ‘Jaws on a spaceship,’” says writer Clay Frohman ( Under Fire). “And they say, ‘Brilliant, fantastic.’ Becomes Alien. That is Jaws on a spaceship, ultimately… . And that’s it. That’s all they want to hear. Their attitude is ‘Don’t confuse us with the details of the story.’ ”

“… Some high-concept stories are more appealing to the studios than others. The ideas liked best are sufficiently original that the audience will not feel it has already seen the movie, yet similar enough to past hits to reassure executives wary of anything too far- out. Thus, the frequently used shorthand: It’s Flashdance in the country (Footloose) or High Noon in outer space (Outland ).”

“… One gambit not to use during a pitch,” says executive Barbara Boyle, “is to talk about big box-office grosses your story is sure to make. Executives know as well as anyone that it’s impossible to predict how much money a movie will make, and declarations to the contrary are considered pure malarkey.”

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when a business records accrued interest expense on a note payable​ ________.

1. Which of the following states that a company must perform strictly proper accounting ONLY for items that are significant to the business’s financial statements?

a. Accounting conservatism

b. Materiality concept

c. Disclosure principle d. Consistency principle

2. Under which of the following inventory costing methods is the Cost of goods sold based on the cost of the oldest purchases?

a. Specific-unit-cost b. Average-cost

c. Last-In, First-Out

d. First-In, First-Out

3. A company purchased 100 units for $20 each on January 31. It purchased 100 units for $30 on February 28. It sold 150 units for $45 each from March 1 through December 31. If the company uses average-cost inventory costing method, what is the amount of ending inventory on December 31?

a. $1,000

b. $1,250 c. $2,250 d. $1,500

4. A company purchased 100 units for $20 each on January 31. It purchased 100 units for $30 on February 28. It sold 150 units for $45 each from March 1 through December 31. If the company uses the Last-In, First-Out inventory costing method, what is the amount of Cost of goods sold on the December 31 income statement?

a. $4,000

b. $3,750 c. $6,750

d. $3,500

5. Samson Company had the following balances and transactions during 2013. Beginning inventory is 10 units at $70. On March 10th 8 units are sold. On June 10th 20 units are purchased at $80. And, on October 30th 15 units are sold. What would the company’s Inventory amount be on the December 31, 2013 balance sheet if the perpetual First-In, First-Out costing method is used?

a. $490 b. $540

c. $560 d. $554

6. Martin Sales had a Beginning inventory balance of $120 made up of 10 units purchased for $12.00 per unit. Early in the month, they purchased 16 units at $10.00 per unit. Later that month, they sold 15 units. Martin uses a perpetual inventory system, and applies FIFO. How much is the Cost of goods sold for the month?

a. $170 b. $150 c. $180 d. $165

7. Martin Sales had a Beginning inventory balance of $120 made up of 10 units purchased for $12.00 per unit. Early in the month, they purchased 16 units at $10.00 per unit. Later that month, they sold 15 units. Martin uses a perpetual inventory system, and applies the average-costing method. How much is the Ending inventory balance?

a. $122 b. $126 c. $118 d. $109

8. The Cost of goods available for sale is equal to the _________.

a. Cost of goods sold minus the Ending inventory b. Sales revenue minus the Cost of goods sold c. Cost of goods sold plus the Ending inventory d. Ending inventory plus the Sales revenues

9. Reducing expense to increase operating profit is representative of _________.

a. safeguarding assets b. following company policies c. promoting operational efficiency d. ensuring accurate, reliable accounting records

10. Sarbanes-Oxley was passed in response to which of the following?

a. The stock market crash of 2002 b. The savings and loan bailout c. The accounting scandals of WorldCom and Enron d. The mounting government deficit

11. A pharmaceutical company testing drugs to determine possible side effects is a part of _________.

a. monitoring controls b. information systems c. control procedures d. risk assessment

12. Which of the following describes the control environment?

a. Internal auditors monitor company controls to safeguard assets, and external auditors monitor the controls to ensure that the accounting records are accurate. b. The control environment is the “tone at the top” of the business. c. The control environment is designed to ensure that the business’s goals are achieved. d. A company must identify its risks.

13. A malicious program that enters program code or destroys data without authorization is an example of _________.

a. a password b. phishing c. encryption d. a virus

14. Which of the following is a benefit of online banking?

a. The business can reconcile to the bank’s balance at any time. b. The bank reconciliation is not necessary. c. The business can reduce their internal controls over cash receipts. d. A company’s book balance will always equal the bank’s balance.

15. Check Number 6135 for $576 was incorrectly entered as $657. Which adjustment needs to be made?

a. Decrease the book balance. b. Decrease the bank statement balance. c. Increase the book balance. d. Increase the bank statement balance.

16. A company’s cash ledger shows an ending balance of $5,000. Reconciling items included a bookkeeper error of $200 (a $300 check recorded as $500), two outstanding checks totaling $720, a service charge of $15, a deposit in transit of $180, and interest revenue of $21. What is the adjusted book balance?

a. $5,194 b. $4,486 c. $5,206 d. $4,806

17. GAAP prefers companies to use the _________ to evaluate bad debts.

a. direct write-off method b. allowance method c. amortization method d. 360-day method

18. Which of the following are the two methods of estimating uncollectible receivables?

a. The allowance method and the amortization method b. The aging-of-accounts-receivable method and the percent-of-sales method c. The gross-up method and the direct write-off method d. The direct write-off method and the percent-of-completion method

19. The Allowance for uncollectible accounts currently has a credit balance of $200. The company’s management estimates that 2.5% of net credit sales will be uncollectible. Net credit sales are $115,000. What will be the balance of the Allowance for uncollectible accounts reported on the balance sheet?

a. $3,275 b. $3,075 c. $2,675 d. $2,875

20. A newly created design business called Smart Art is just finishing up its first year of operations. During the year, there were credit sales of $40,000 and collections of $36,000. One account for $650 was written off. Smart Art uses the percent-of-sales method to account for uncollectible account expense, and has decided to use a factor of 2% for their year-end adjustment of uncollectible account expense. At the end of the year, what is the ending balance in Accounts receivable?

a. $4,000 b. $36,000 c. $3,350 d. $39,350

21. A company has significant uncollectible receivables. Why is the direct write-off method unacceptable?

a. Assets will be understated on the balance sheet. b. It violates the matching principle. c. Direct write-offs would be immaterial. d. It is not allowed for tax reasons.

22. Which of the following exists if the maker of a promissory note fails to pay the note on the due date?

a. A discounted note b. A depreciated note c. An amortized note d. A dishonored note

23. What is the total interest on a 3-month, 9% note for $32,000?

a. $720 b. $1,440 c. $2,880 d. $460

24. On December 1, 2014, Parsons Sales sold machinery to a customer for $2,000. The customer could not pay at the time of sale, but agreed to pay 9 months later, and signed a 9-month note at 12% interest. How much interest revenue was earned during the year 2015?

a. $180 b. $75 c. $160 d. $90

25. Which of the following is not a characteristic of a plant asset?

a. The asset is used in the production of income for the business. b. The asset is available for sale to customers in the ordinary course of business. c. The asset has physical form. d. The asset has future usefulness and value.

26. A company purchased a used machine for $80,000. The machine required installation costs of $8,000 and insurance while in transit of $500. At which of the following amounts would the equipment be recorded?

a. $80,500 b. $88,500 c. $88,000 d. $80,000

27. Which of the following items should be depreciated?

a. Tangible property, plant, and equipment, other than land b. Intangible property c. Land d. Natural resources

28. Which of the following depreciation methods allocates a fixed amount of depreciation to miles driven, hours used, or some other measure of the asset’s utilization?

a. Straight-line b. Declining-balance c. Units-of-production d. Double-declining-balance

29. On January 1, 2013, Zane Manufacturing Company purchased a machine for $40,000. The company expects to use the machine a total of 24,000 hours over the next 6 years. The estimated sales price of the machine at the end of six years is $4,000. The company used the machine 8,000 hours in 2013 and 12,000 in 2014. What is depreciation expense for 2014 if the company uses double-declining- balance depreciation?

a. $13,333 b. $8,889 c. $6,000 d. $10,000

30. On January 1, 2013, Zane Manufacturing Company purchased a machine for $40,000. The company expects to use the machine a total of 24,000 hours over the next 6 years. The estimated sales price of the machine at the end of 6 years is $4,000. The company used the machine 8,000 hours in 2013 and 12,000 in 2014. What is depreciation expense for 2013 if the company uses straight-line depreciation?

a. $6,667 b. $13,333 c. $12,000 d. $6,000

31. On January 1, 2013, Zane Manufacturing Company purchased a machine for $40,000. The company expects to use the machine a total of 24,000 hours over the next 6 years. The estimated sales price of the machine at the end of six years is $4,000. The company used the machine 8,000 hours in 2013 and 12,000 hours in 2014. What is depreciation expense for 2014 if the company uses units-of- production depreciation?

a. $6,000 b. $18,000 c. $10,000 d. $9,000

32. Avery Sales purchased telecom equipment for $5,000 on July 1, 2013. It has estimated residual value of $200, and an estimated life of 8 years. If Avery uses straight-line depreciation, how much expense will be recorded in 2013?

a. $312 b. $300 c. $600 d. $625

33. Which of the following occurs when a company records accrued interest expense on a note payable?

a. Interest expense is credited. b. Note payable is credited. c. Cash is debited. d. Interest payable is credited.

34. Sales revenue for a sporting goods store amounted to $215,000 for the current period. All sales are on account and are subject to a sales tax of 7%. Which of the following would be included in the journal entry to record these sales?

a. A debit to Sales revenue for $215,000 b. A credit to Accounts receivable for $215,000 c. A debit to Sales tax payable for $15,050 d. A debit to Accounts receivable for $230,050

35. A $20,000, 3-month, 8% note payable was issued on November 1, 2015. What is the amount of accrued interest on December 31, 2015?

a. $200 b. $267 c. $133 d. $800

36. Joe signs a $5,000, 8%, 6-month note dated September 1, 2012. What is Joe’s 2013 interest expense for this note?

a. $133 b. $200 c. $400 d. $67

37. The journal entry for accrued interest on a note payable includes _______.

a. debiting Interest expense and crediting Cash b. debiting Interest expense and crediting Accrued interest payable c. debiting Accrued interest expense and crediting Cash d. crediting Accrued interest expense

38. Which of the following principles requires that warranty expense be recorded in the period that revenue is recorded?

a. Consistency principle b. Matching principle c. Revenue principle d. Materiality concept

39. Sue works 46 hours at her job during the week. She is paid $13.30 per hour and receives overtime at the rate of time-and-one-half for hours worked over 40. What is Sue’s gross pay for the week?

a. $611.80 b. $917.70 c. $651.70 d. Some other amount

40. Tom’s gross pay for the week is $800. Tom’s deduction for federal income tax is based on a rate of 18%. Tom has no voluntary deductions. Tom’s yearly pay is under the limit for OASDI. What is the amount of Tom’s net pay?

a. $594.80 b. $738.80 c. $656.00 d. $533.60

41. On November 1, 2012, EZ Products borrowed $48,000 on a 5%, 10-year note with annual installment payments of $4,800 plus interest due on November 1 of each succeeding year. On November 1, the principal amount was initially recorded as Long-term notes payable, and then a second entry was made to reclassify the current portion. Which of the following is the proper reclassification entry?

a. Debit Long-term notes payable and Credit Current portion of long-term notes payable for $4,800 b. Debit Current portion of long-term notes payable and Credit Accounts payable for $4,800 c. Debit Long-term notes payable and Credit Accounts payable for $4,800 d. Debit Current portion of long-term notes payable and Credit Long-term notes payable for $4,800

42. On November 1, 2012, EZ Products borrowed $48,000 on a 5%, 10-year note with annual installment payments of $4,800 plus interest due on November 1 of each succeeding year. On December 31, 2013, what will the balance be in the account titled Current portion of long-term notes payable?

a. $400 b. $48,000 c. $43,200 d. $4,800

43. Paris Company buys a building on a plot of land for $100,000, paying $20,000 cash and signing a 20- year mortgage note for $80,000 at 6%. Monthly payments are $570. What portion of the first monthly payment is principal?

a. $170 b. $200 c. $570 d. $4,800

44. Which of the following occurs when a bond’s stated interest rate is higher than the market interest rate?

a. The bond will be issued at a premium. b. The bond will be issued at maturity value. c. The bond will be issued at a discount. d. The bond will be issued at par.

45. The interest rate on which cash payments to bondholders are based is the ________.

a. market rate b. discount rate c. stated rate d. amortization rate

46. Which of the following describes a secured bond?

a. A bond that repays principal in installments b. A bond that gives the bondholder a claim for specific assets if the issuer fails to pay c. A bond that matures at one specified time d. A bond that is not backed by specific assets

47. If bonds with a face value of $100,000 are sold at $102, the amount of cash proceeds is:

a. $108,800 b. $100,000 c. $99,898 d. $102,000

48. On January 1, 2012, Davie Services issued $20,000 of 8% bonds that mature in five years. They were sold at discount, for a total of $19,000. On January 1, 2017, when the bonds mature, Davie Services will make the final principal payment. That entry will be which of the following?

a. Debit Bond discount for $1,000 and credit Cash for $1,000. b. Debit Bonds payable for $19,000 and credit Cash for $1,000. c. Debit Bonds payable for $20,000 and credit Cash for $20,000. d. Debit Bonds payable for $19,000, debit Bond discount for $1,000 and credit Cash for $19,000.

49. On January 2, 2014, Mahoney Sales issued $10,000 in bonds for $10,900. They were 5-year bonds with a stated rate of 4%, and pay semiannual interest payments. Mahoney Sales uses the straight line method to amortize the bond premium. After the first interest payment on June 30, 2014, what was the bond carrying amount?

a. $9,100 b. $10,810 c. $9,810 d. $9,190

50. McDonald Sales prepared a bond issue of $20,000 dated January 1, 2013. The bonds have a stated rate of 3% and a term of 6 years. The bond issue was delayed, and the bonds were finally sold on March 1, 2013 at par. On June 30, 2013, the first semiannual interest payment is made. How much will be paid out to bondholders on June 30, 2013?

a. $100 b. $200 c. $300 d. $600

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shame resilience theory

Read the article on Shame Resilience Theory:A Grounded Theory Study on Women and Shame” By Brene Brown.

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               a. What is the author’s thesis or main point

3. Does the author discuss prior research

               a. What does the prior research say?

4. You must attempt to write every sentence in active voice.

               a. Active voice simply means the subject proceeds the verb in the main clause.

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               a. Use proper in-text citation

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anthropologist bronislaw malinowski’s study of the trobriand islanders observed that __________.

Conformity and Conflict

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Conformity and Conflict Readings in Cultural Anthropology


DAVID W. MCCURDY Macalester College

Boston Columbus Indianapolis New York San Francisco Upper Saddle River

Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montrial Toronto Delhi Mexico City S ão Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo

Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on page 397.

Copyright © 2012, 2009 by Pearson Education, Inc. All rights reserved. Printed in the United States of America. This publication is protected by Copyright and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Permissions Department, One Lake Street, Upper Saddle River, New Jersey 07458 or you may fax your request to 201-236-3290.

Library of Congress Cataloging-in-Publication Data

Conformity and conflict : readings in cultural anthropology / [edited by]

James Spradley, David W. McCurdy.—14th ed.

p. cm.

Includes index.

ISBN-13: 978-0-205-23410-3

ISBN-10: 0-205-23410-0

1. Ethnology. 2. Anthropology. I. Spradley, James P. II. McCurdy, David W.

GN325.C69 2011

306—dc22 2011015812

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Student Edition: ISBN 10: 0-205-23410-0 ISBN 13: 978-0-205-23410-3

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World Map and Geographical Placement of Readings inside cover

Preface xiii

ONE Culture and Ethnography 1

1 Ethnography and Culture 6 JAMES P. SPRADLEY

To discover culture, the ethnographer must learn from the informant as a student.

2 Eating Christmas in the Kalahari 13 RICHARD BORSHAY LEE

The “generous” gift of a Christmas ox involves the anthropologist in a classic case of cross-cultural misunderstanding.

3 Fieldwork on Prostitution in the Era of AIDS 20 CLAIRE E. STERK

Fieldwork among urban prostitutes means doing ethnography under difficult but, in the end, manageable circumstances.

4 Nice Girls Don’t Talk to Rastas 31 GEORGE GMELCH

Interaction between a U.S. student and a Rastafarian illustrates the destructive power of naïve realism in the fieldwork setting.

TWO Language and Communication 37

5 Shakespeare in the Bush 41 LAURA BOHANNAN

Cross-cultural communication breaks down when an anthropologist attempts to translate the meaning of Hamlet to the Tiv.


vi Contents

6 Whorf Revisited: You Are What You Speak 49 GUY DEUTSCHER

New evidence supports Benjamin Lee Whorf’s contention that peoples’ mother tongue can shape their experience of the world.

7 Manipulating Meaning: The Military Name Game 57 SARAH BOXER

To frame the meaning of its military operations, U.S. armed forces try to name them positively without offending anyone.

8 Conversation Style: Talking on the Job 61 DEBORAH TANNEN

On the job, men and women use distinctive conversation styles to ask for help, leading them to evaluate performance and character differently.

THREE Ecology and Subsistence 69

9 The Hunters: Scarce Resources in the Kalahari 73 RICHARD BORSHAY LEE

!Kung and other foragers traditionally worked less and ate better than many other people with more “advanced” food producing techniques. Today, however, their survival depends more on drilling wells and keeping cattle than on collecting wild foods.

10 Eskimo Science 87 RICHARD NELSON

The knowledge developed by Eskimos to hunt successfully contains the same basic principles that underlie a more formally structured scientific method.

11 Domestication and the Evolution of Disease 93 JARED DIAMOND

Herd animal diseases that evolved to infect humans have ended up killing millions of people in the old and new world.

12 Forest Development the Indian Way 105 RICHARD K. REED

South American governments could learn much about tropical forest development from the Amazonian Indians who live there.

Contents vii

FOUR Economic Systems 115

13 Reciprocity and the Power of Giving 119 LEE CRONK

Gifts not only function to tie people together, they may also be used to “flatten” an opponent and control the behavior of others.

14 Poverty at Work: Office Employment and the Crack Alternative 125 PHILIPPE BOURGOIS

Poor, uneducated Puerto Rican men living in Spanish Harlem feel that the risks they run selling drugs are preferable to the disrespect they encounter as low-wage employees in New York’s financial and service companies.

15 Cocaine and the Economic Deterioration of Bolivia 136 JACK WEATHERFORD

The world market for cocaine robs Bolivian villages of their men and causes problems for health, nutrition, transportation, and family.

16 Malawi versus the World Bank 145 SONIA PATTEN

Malawi government’s successful state subsidized fertilizer program challenges the World Bank and IMF’s insistence on market-driven agricultural programs.

FIVE Kinship and Family 151

17 Mother’s Love: Death without Weeping 155 NANCY SCHEPER-HUGHES

Close mother-child bonds suffered in the presence of high infant mortality in a Brazilian shantytown although recent changes have reduced the problem to some degree.

18 Family and Kinship in Village India 165 DAVID W. MCCURDY

Kinship still organizes the lives of Bhil villagers despite economic opportunities that draw people away from the community and dependence on relatives.

viii Contents

19 Polyandry: When Brothers Take a Wife 172 MELVYN C. GOLDSTEIN

By jointly marrying one woman, Tibetan brothers preserve family resources and the “good life.”

20 Uterine Families and the Women’s Community 179 MARGERY WOLF

To succeed in a traditional patrilineal family, a Chinese woman had to create her own informal uterine family inside her husband’s household.

SIX Identity, Roles, and Groups 185

21 You@Work: Jobs, Identity, and the Internet 189 BRENDA MANN

Topday’s U.S. job mobility requires “branding” one’s identity through careful use of the Internet.

22 The Opt-Out Phenomenon: Women, Work, and Identity in America 197 DIANNA SHANDY AND KARINE MOE

Why were young, educated professional women leaving high-paying jobs for a life at home and what difference has today’s tough economy made?

23 Do Muslim Women Really Need Saving? 208 LILA ABU-LUGHOD

Americans should work for justice in the world, not save Muslim women from wearing burqas or following their Islamic religion.

24 Mixed Blood 217 JEFFERSON M. FISH

A woman can change her race from black to “brunette” by taking a plane from New York to Brazil.

SEVEN Law and Politics 227

25 Cross-Cultural Law: The Case of the Gypsy Offender 230 ANNE SUTHERLAND

Legal cultures clash when a young Gypsy is convicted of using someone else’s social security number to apply for a car loan.

Contents ix

26 Life without Chiefs 238 MARVIN HARRIS

Small societies based on reciprocal and redistributive economic exchange can do without officials.

27 The Founding Indian Fathers 246 JACK WEATHERFORD

Although their contribution goes unrecognized, Indian, especially Iroquoian, political structure may have served as a model that helped to produce a United States federal government.

EIGHT Religion, Magic, and World View 255

28 Taraka’s Ghost 260 STANLEY A. FREED AND RUTH S. FREED

A woman relieves her anxiety and gains family support when a friend’s ghost possesses her.

29 Baseball Magic 266 GEORGE GMELCH

American baseball players from the game’s introduction to today employ magical practices as they try to deal with the uncertainty of their game.

30 Run for the Wall: An American Pilgrimage 275 JILL DUBISCH

An annual ritual motorcycle pilgrimage from Los Angles to Washington, DC personally transforms the Vietnam veterans and others who ride in it.

31 Body Ritual among the Nacirema 287 HORACE MINER

The Nacirema display a complex array of body rituals aimed at achieving health and beauty.

NINE Globalization 293

32 How Sushi Went Global 296 THEODORE C. BESTOR

International interdependence between tuna fishermen and sushi as a Japanese culinary style becomes popular in a globalized world.

x Contents

33 Village Walks: Tourism and Globalization among the Tharu of Nepal 306 ARJUN GUNERATNE AND KATE BJORK

Advertised as a primitive tribe, Tharu villagers endure tours that falsely treat them as part of the Chitwan National Forest’s natural history and have responded by building a museum to separate their past from the present.

34 The Road to Refugee Resettlement 316 DIANNA SHANDY

Nuer refugees must develop the skill and determination to pass through a series of bureaucratic hurdles to reach and adjust to life in the United States.


Millions of women migrate from poor to wealthy nations serving as nannies, maids, and sex workers. They send money home but find it hard to separate from their countries and families.

TEN Culture Change and Applied Anthropology 335

36 Advice for Developers: Peace Corps Problems in Botswana 340 HOYT S. ALVERSON

An anthropologist discovers why some Peace Corps volunteers fail to complete their assignments in rural Botswana, citing perceptions of their role and naïve realism as the basic problems.

37 Medical Anthropology: Leprosy on the Ganges 351 RON BARRETT

Indians who contract leprosy find themselves stigmatized for life, causing them to delay treatment or amplify symptoms to enhance begging.

38 Public Interest Ethnography: Women’s Prisons and Health Care in California 359 RACHAEL STRYKER

Student ethnographers uncover institutional health care problems at two women’s prisons in California and suggest changes that result in a revision of state policy.

Contents xi

39 Using Anthropology 371 DAVID W. MCCURDY

Professional anthropologists do everything from ethnographies of automobile production lines to famine relief, but even the neophyte may be able to use the ideas of culture and ethnography to succeed in the workplace.

40 Career Advice for Anthropology Undergraduates 382 JOHN T. OMOHUNDRO

The ability to translate useful anthropological skills into “resume speak” is one way for anthropology graduates to find employment.

Glossary 391

Photo Credits 397

Text Credits 399

Index 403

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Forty-one years ago as we prepared the first edition of this book, Jim Spradley and I sought to make the communication of cultural anthropology more effective for both students and instructors. We looked for useful, engaging articles written by anthropolo- gists for non-anthropologists. We encouraged anthropologists to send us articles that fit our design for Conformity and Conflict . We sought out material that demonstrated the nature of culture and its influence on people’s lives. We included more material on Western, especially North American, cultures so students could make their own cul- tural comparisons and see the relation between anthropology and their own lives. We chose articles that reflected interesting topics and current issues, but we also looked for selections that illustrated important anthropological concepts and theories because we believed that anthropology provides a unique and powerful way to look at human experience. Finally, we organized the book around traditional topics found in many textbooks and courses.

The original features of Conformity and Conflict remain part of its design today, but the book’s content has also altered over the years to reflect changing instructional and disciplinary interests and the needs and suggestions provided by students and instructors. Part introductions now include discussion of many basic anthropological definitions for use by instructors who do not want to assign a standard text but find it helpful to provide students with a terminological foundation. Article introductions seek to tie selections to anthropological concepts and explanations in a coherent and systematic way. Articles and section parts have grown to include environmental, global, medical, and practical anthropological sub fields as well as traditional interests such as language, gender, kinship, economics, politics, law, and religion.

Several student aids are retained in the fourteenth edition. Lists of key terms accompany each part introduction. Each article is followed by several review questions. Maps locating societies discussed in articles accompany each selection. There is also a glossary and subject index at the end of the book.

What’s New to This Edition

The revision of the fourteenth edition includes a number of changes and updates:

• There are eight new articles, and two selections have been brought back from previous editions.

• Five articles found in the thirteenth edition have also been revised and updated. • Four of the eight new articles have been written especially for the fourteenth edi-

tion making fourteen original articles altogether. • Part 2, Language and Communication , has been revised to include definitions

and discussion of two new concepts, metaphor and symbolic framing. It also


xiv Preface

includes a new article on the resurrection of the Sapir-Whorf hypothesis by linguist, Guy Deutscher.

• Part 3, Subsistence and Ecology , contains a new article comparing Eskimo hunting knowledge to the structure of scientific inquiry. It also includes an article by Jared Diamond on the origin and spread of crowd diseases brought back from a previous edition. Richard Reed’s article on Forest Development is updated.

• Part 6, Identity, Roles, and Groups , contains two new articles. The first, an original selection by Brenda Mann, looks at how the Internet is used by employers and job seekers to shape and present work identities. The second, by Lila Abu-Lughod urges American women to work for justice in the world, not saving Muslim women from wearing the burqa. Dianna Shandy and Karine Moe’s article is updated to reflect recent trends in women’s decisions about work and family.

• Part 9 , Globalization , now includes an original selection by Arjun Guneratne and Kate Bjork on tourism from the native viewpoint in Nepal, and another brought back from a previous edition by Theodore Bestor about the world impact of sushi. Dianna Shandy’s article on refugees has also been updated to reflect the recent vote for independence in South Sudan.

• Part 10, Culture Change and Applied Anthropology, begins with an article on Peace Corps problems in Botswanna by Hoyt Alverson. This is followed by a new original article by medical anthropologist, Ron Barrett, about the nature of leprosy and its stigmatization in Banaras (Varanasi) North India, and another original article by Rachael Stryker on public interest anthropology at work in a study of the health services afforded women inmates in two California Prisons.

Support for Instructors and Students

• is an interactive and instructive multimedia site designed to help students and instructors save time and improve results. It offers access to a wealth of resources geared to meet the individual teaching and learning needs of every instructor and student. Combining an ebook, video, audio, multimedia simulations, research support and assessment, MyAnthroLab engages students and gives them the tools they need to enhance their performance in the course. Please see your Pearson sales representative or visit for more information.

• Instructor’s Manual with Tests (0205064566): For each chapter in the text, this valuable resource provides a detailed outline, list of objectives, discussion ques- tions, and suggested readings. In addition, test questions in multiple-choice, true/ false, fill-in-the-blank, and short answer formats are available for each chapter; the answers are page-referenced to the text. For easy access, this manual is avail- able within the instructor section of MyAnthroLab for Conformity and Conflict, or at

• MyTest (020506454X): This computerized software allows instructors to create their own personalized exams, edit any or all of the existing test questions, and add new questions. Other special features of the program include random

Preface xv

of test questions, creation of alternate versions of the same test, scrambling ques- tion sequence, and test preview before printing. For easy access, this software is available at

• PowerPoint Presentation Slides for Conformity and Conflict (0205064558): These PowerPoint slides help instructors convey anthropology principles in a clear and engaging way. For easy access, they are available within the instructor section of MyAnthroLab for Conformity and Conflict, or at www.pearsonhighered .com/irc.

It has always been my aim to provide a book that meets the needs of students and instructors. To help with this goal, I encourage you to send your comments and ideas for improving Conformity and Conflict to me at Ideas for future original selections are also welcome.

Many people have made suggestions that guided this revision of Conformity and Conflict. I am especially grateful to colleagues Dianna Shandy, Arjun Guneratne, Ron Barrett, and Sonia Patten for their advice and help as well as George Gmelch for his many suggestions. Thanks also to reviewers of this edition: Jane Park, Seton Hall Uni- versity; Neill Hadder, The University of Texas—Austin; Autumn Cahoon, California State University—Sacramento; Kurt Reymers, Morrisville State College; K. Jill Fleu- riet, University of Texas—San Antonio; Susan Schalge, Minnesota State University; Kristen Kuehnle, Salem State College; Joy Livergood, Columbus State Community College; Willem Clements, Arkansas State University. I would also like to thank my ed- itors Nancy Roberts and Nicole Conforti for their guidance and work on this volume.

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Ethnography and Culture 6 James P. Spradley

Eating Christmas in the Kalahari 13 Richard Borshay Lee

Fieldwork on Prostitution in the Era of AIDS 20 Claire E. Sterk

Nice Girls Don’t Talk to Rastas 31 George Gmelch




2 P A R T O N E Culture and Ethnography

Culture, as its name suggests, lies at the heart of cultural anthropology. And the concept of culture, along with ethnography, sets anthropology apart from other so- cial and behavioral sciences. Let us look more closely at these concepts.

To understand what anthropologists mean by culture, imagine yourself in a for- eign setting, such as a market town in India, forgetting what you might already know about that country. You step off a bus onto a dusty street where you are immediately confronted by strange sights, sounds, and smells. Men dress in Western clothes, but of a different style. Some women drape themselves in long shawls that entirely cover their bodies. They peer at you through a small gap in this garment as they walk by. Buildings are one- or two-story affairs, open at the front so you can see inside. Near you some people sit on wicker chairs eating strange foods. Most unusual is how peo- ple talk. They utter vocalizations unlike any you have ever heard, and you wonder how they can possibly understand each other. But obviously they do, since their be- havior seems organized and purposeful.

Scenes such as this confronted early explorers, missionaries, and anthropolo- gists, and from their observations an obvious point emerged. People living in various parts of the world looked and behaved in dramatically different ways. And these dif- ferences correlated with groups. The people of India had customs different from those of the Papuans; the British did not act and dress like the Iroquois.

Two possible explanations for group differences came to mind. Some argued that group behavior was inherited. Dahomeans of the African Gold Coast, for exam- ple, were characterized as particularly “clever and adaptive” by one British colonial official, while, according to the same authority, another African group was “happy-go- lucky and improvident.” Usually implied in such statements was the idea that group members were born that way. Such thinking persists to the present and in its most malignant extreme takes the form of racism.

But a second explanation also emerged. Perhaps, rather than a product of inher- itance, the behavior characteristic of a group was learned. The way people dressed, what they ate, how they talked—all these could more easily be explained as acquisi- tions. Thus a baby born on the African Gold Coast would, if immediately transported to China and raised like other children there, grow up to dress, eat, and talk like a Chinese. Cultural anthropologists focus on the explanation of learned behavior.

The idea of learning, and a need to label the lifestyles associated with particular groups, led to the definition of culture. In 1871, British anthropologist Sir Edward Burnett Tylor argued that “Culture . . . is that complex whole which includes knowl- edge, belief, art, law, morals, custom, and any other capabilities and habits acquired by man as a member of society.” 1 The definition we present here places more em- phasis on the importance of knowledge than does Tylor’s. We will say that culture is the learned and shared knowledge that people use to generate behavior and interpret experience.

Important to this definition is the idea that culture is a kind of knowledge, not behavior. It is in people’s heads. It reflects the mental categories they learn from oth- ers as they grow up. It helps them generate behavior and interpret what they experi- ence. At the moment of birth, we lack a culture. We don’t yet have a system of beliefs, knowledge, and patterns of customary behavior. But from that moment until we die,

1 Edward Burnett Tylor, Primitive Culture (New York: Harper Torchbooks, Harper & Row, 1958; originally published by John Murray, London, 1871), p. 1.

P A R T O N E Culture and Ethnography 3

each of us participates in a kind of universal schooling that teaches us our native cul- ture. Laughing and smiling are genetic responses, but as infants we soon learn when to smile, when to laugh, and even how to laugh. We also inherit the potential to cry, but we must learn our cultural rules for when crying is appropriate.

As we learn our culture, we acquire a way to interpret experience. For example, Americans learn that dogs are like little people in furry suits. Dogs live in our houses, eat our food, share our beds. They hold a place in our hearts; their loss causes us to grieve. Villagers in India, on the other hand, often view dogs as pests that are useful only for hunting (in those few parts of the country where one still can hunt) and as watchdogs. Quiet days in Indian villages are often punctuated by the yelp of a dog that has been threatened or actually hurt by its master or a bystander.

Clearly, it is not the dogs that are different in these two societies. Rather, it is the meaning that dogs have for people that varies. And such meaning is cultural; it is learned as part of growing up in each group.

There are two basic kinds of culture, explicit and tacit. Explicit culture is cul- tural knowledge that people can talk about. As you grow up, for example, you learn that there are words for many things you encounter. There are items such as clothes, actions such as playing, emotional states such as sadness, ways to talk such as yelling, and people such as mother. Recognizing that culture may be explicit is important to the ethnographic process discussed below. If people have words for cultural catego- ries, anthropologists can use interviews or observations of people talking to uncover them. Because so much culture is explicit, words—both spoken and written—become essential to the discovery and understanding of a culture.

Tacit culture is cultural knowledge that people lack words for. For example, as we grow up we learn to recognize and use a limited number of sound categories such as /d/, /e/, and /f/. Although anthropological linguists have given sound categories a name (phonemes), nonlinguists lack such a term. Instead, we learn our sound catego- ries by hearing and replicating them and we use them unconsciously. No parent said, “Now let’s work on our phonemes tonight, dear,” to us when we were little.

Anthropologist Edward Hall pioneered the study of tacit culture. He noted, for example, that middle-class North Americans observe four speaking distances—inti- mate, personal, social, and public—without naming them. (Hall, not his informants, invented the terms above.) Hall also noticed that people from other societies observed different tacit speaking distances, so that a Latin American’s closer (than North Amer- ican) personal speaking distance made North Americans uncomfortable because it seemed intimate. Because it is unspoken, tacit culture can be discovered only through behavioral observation.

Ethnography is the process of discovering and describing a particular culture. It involves anthropologists in an intimate and personal activity as they attempt to learn how the members of a particular group see their worlds.

But which groups qualify as culture-bearing units? How does the anthropolo- gist identify the existence of a culture to study? This was not a difficult question when anthropology was a new science. As Tylor’s definition notes, culture was the whole way of life of a people. To find it, one sought out distinctive ethnic units, such as Bhil tribals in India or Apaches in the American Southwest. Anything one learned from such people would be part of their culture.

But discrete cultures of this sort are becoming more difficult to find. The world is increasingly divided into large national societies, each subdivided into a myriad of subgroups. Anthropologists are finding it increasingly attractive to study such

4 P A R T O N E Culture and Ethnography

subgroups, because they form the arena for most of life in complex society. And this is where the concept of the microculture enters the scene.

Microcultures are systems of cultural knowledge characteristic of subgroups within larger societies. Members of a microculture will usually share much of what they know with everyone in the greater society but will possess a special cultural knowledge that is unique to the subgroup. For example, a college fraternity has a mi- croculture within the context of a university and a nation. Its members have special daily routines, jokes, and meanings for events. It is this shared knowledge that makes up their microculture and that can serve as the basis for ethnographic study. More and more, anthropologists are turning to the study of microcultures, using the same ethnographic techniques they employ when they investigate the broader culture of an ethnic or national group.

More than anything else, it is ethnography that is anthropology’s unique contri- bution to social science. Most scientists, including many who view people in social context, approach their research as detached observers. As social scientists, they ob- serve the human subjects of their study, categorize what they see, and generate theory to account for their findings. They work from the outside, creating a system of knowl- edge to account for other people’s behavior. Although this is a legitimate and often useful way to conduct research, it is not the main task of ethnography.

Ethnographers seek out the insider’s viewpoint. Because culture is the knowl- edge people use to generate behavior and interpret experience, the ethnographer seeks to understand group members’ behavior from the inside, or cultural, perspec- tive. Instead of looking for a subject to observe, ethnographers look for an informant to teach them the culture. Just as children learn their native culture from parents and other people in their social environment, ethnographers learn another culture by inferring folk categories from the observation of behavior and by asking informants what things mean.

Anthropologists employ many strategies during field research to understand another culture better. But all strategies and all research ultimately rest on the co- operation of informants. An informant is neither a subject in a scientific experi- ment nor a respondent who answers the investigator’s questions. An informant is a teacher who has a special kind of pupil: a professional anthropologist. In this unique relationship a transformation occurs in the anthropologist’s understanding of an alien culture. It is the informant who transforms the anthropologist from a tourist into an ethnographer. The informant may be a child who explains how to play hopscotch, a cocktail waitress who teaches the anthropologist to serve drinks and to encourage customers to leave tips, an elderly man who teaches the anthro- pologist to build an igloo, or a grandmother who explains the intricacies of Zapotec kinship. Almost any individual who has acquired a repertoire of cultural behavior can become an informant.

Ethnography is not as easy to do as we might think. For one thing, North Ameri- cans are not taught to be good listeners. We prefer to observe and draw our own conclusions. We like a sense of control in social contexts; passive listening is a sign of weakness in our culture. But listening and learning from others is at the heart of eth- nography, and we must put aside our discomfort with the student role.

It is also not easy for informants to teach us about their cultures. Culture often lies below a conscious level. A major ethnographic task is to help informants remem- ber their culture.

Naive realism may also impede ethnography. Naive realism is the belief that people everywhere see the world in the same way. It may, for example, lead the

unwary ethnographer to assume that beauty is the same for all people everywhere or, to use our previous example, that dogs should mean the same thing in India as they do in the United States. If an ethnographer fails to control his or her own naive real- ism, inside cultural meanings will surely be overlooked.

Culture shock and ethnocentrism may also stand in the way of ethnographers. Culture shock is a state of anxiety that results from cross-cultural misunderstanding. Immersed alone in another society, the ethnographer understands few of the cultur- ally defined rules for behavior and interpretation used by his or her hosts. The result is anxiety about proper action and an inability to interact appropriately in the new context.

Ethnocentrism can be just as much of a liability. Ethnocentrism is the belief and feeling that one’s own culture is best. It reflects our tendency to judge other peo- ple’s beliefs and behavior using values of our own native culture. Thus if we come from a society that abhors painful treatment of animals, we are likely to react with anger when an Indian villager hits a dog with a rock. Our feeling is ethnocentric.

It is impossible to rid ourselves entirely of the cultural values that make us eth- nocentric when we do ethnography. But it is important to control our ethnocentric feeling in the field if we are to learn from informants. Informants resent negative judgment.

Finally, the role assigned to ethnographers by informants affects the quality of what can be learned. Ethnography is a personal enterprise, as all the articles in this section illustrate. Unlike survey research using questionnaires or short interviews, ethnography requires prolonged social contact. Informants will assign the ethnogra- pher some kind of role and what that turns out to be will affect research.

The selections in Part One illustrate several points about culture and ethnogra- phy. The first piece, by the late James Spradley, takes a close look at the concept of culture and its role in ethnographic research. The second, by Richard Lee, illustrates how a simple act of giving can have a dramatically different cultural meaning in two societies, leading to cross-cultural misunderstanding. In the third selection, Claire Sterk describes how she conducted ethnographic field research under difficult cir- cumstances. She sought to learn the culture of prostitutes working in New York City and Atlanta as part of a broader research interest in the spread and control of AIDS. The fourth article, by George Gmelch, explores how naive realism nearly ended a student’s field research in Barbados.

Key Terms

P A R T O N E Culture and Ethnography 5

culture p. 2 culture shock p. 5 detached observers p. 4 ethnocentrism p. 5 ethnography p. 3 explicit culture p. 3

informant p. 4 microcultures p. 4 naive realism p. 4 respondent p. 4 subject p. 4 tacit culture p. 3


1 Ethnography and Culture James P. Spradley

Most Americans associate science with detached observation; we learn to observe what- ever we wish to understand, introduce our own classification of what is going on, and ex- plain what we see in our own terms. In this selection, James Spradley argues that cultural anthropologists work differently. Ethnography is the work of discovering and describing a particular culture; culture is the learned, shared knowledge that people use to generate be- havior and interpret experience. To get at culture, ethnographers must learn the meanings of action and experience from the insider’s or informant’s point of view. Many of the exam- ples used by Spradley also show the relevance of anthropology to the study of culture in the United States.*

Listen to the Chapter Audio on

Ethnographic fieldwork is the hallmark of cultural anthropology. Whether in a jun- gle village in Peru or on the streets of New York, the anthropologist goes to where peo- ple live and “does fieldwork.” This means participating in activities, asking questions,

* “Ethnography and Culture” from Participant Observation by James P. Spradley. Copyright © 1980 by Holt, Rinehart, and Winston, Inc. Reprinted by permission of Barbara Spradley.

C H A P T E R 1 Ethnography and Culture 7

eating strange foods, learning a new language, watching ceremonies, taking field notes, washing clothes, writing letters home, tracing out genealogies, observing play, interviewing informants, and hundreds of other things. This vast range of ac- tivities often obscures the nature of the most fundamental task of all fieldwork: doing ethnography.

Ethnography is the work of describing a culture. The central aim of ethnography is to understand another way of life from the native point of view. The goal of ethnography, as Malinowski put it, is “to grasp the native’s point of view, his relation to life, to realize his vision of his world.” 1 Fieldwork, then, involves the disciplined study of what the world is like to people who have learned to see, hear, speak, think, and act in ways that are dif- ferent. Rather than studying people, ethnography means learning from people. Consider the following illustration.

George Hicks set out, in 1965, to learn about another way of life, that of the moun- tain people in an Appalachian valley. 2 His goal was to discover their culture, to learn to see the world from their perspective. With his family he moved into Little Laurel Valley, his daughter attended the local school, and his wife became one of the local Girl Scout leaders. Hicks soon discovered that stores and storekeepers were at the center of the val- ley’s communication system, providing the most important social arena for the entire valley. He learned this by watching what other people did, by following their example, and slowly becoming part of the groups that congregated daily in the stores. He writes:

At least once each day I would visit several stores in the valley, and sit in on the groups of gossiping men or, if the storekeeper happened to be alone, perhaps attempt to clear up puzzling points about kinship obligations. I found these hours, particularly those spent in the presence of the two or three excellent storytellers in the Little Laurel, thoroughly enjoyable. . . . At other times, I helped a number of local men gather corn or hay, build sheds, cut trees, pull and pack galax, and search for rich stands of huckleberries. When I needed aid in, for example, repairing frozen water pipes, it was readily and cheerfully provided. 3

In order to discover the hidden principles of another way of life, the researcher must become a student. Storekeepers and storytellers and local farmers become teach- ers. Instead of studying the “climate,” the “flora,” and the “fauna” that made up the environment of this Appalachian valley, Hicks tried to discover how these mountain people defined and evaluated trees and galax and huckleberries. He did not attempt to describe social life in terms of what most Americans know about “marriage,” “family,” and “friendship”; instead he sought to discover how these mountain people identified relatives and friends. He tried to learn the obligations they felt toward kinsmen and discover how they felt about friends. Discovering the insider’s view is a different spe- cies of knowledge from one that rests mainly on the outsider’s view, even when the outsider is a trained social scientist.

Consider another example, this time from the perspective of a non- Western eth- nographer. Imagine an Inuit woman setting out to learn the culture of Macalester Col- lege. What would she, so well schooled in the rich heritage of Inuit culture, have to do

1 Bronislaw Malinowski, Argonauts of the Western Pacific (London: Routledge, 1922), p. 22.

2 George Hicks, Appalachian Valley (New York: Holt, Rinehart, and Winston, 1976).

3 Hicks, p. 3.

8 P A R T O N E Culture and Ethnography

in order to understand the culture of Macalester College students, faculty, and staff? How would she discover the patterns that made up their lives? How would she avoid imposing Inuit ideas, categories, and values on everything she saw?

First, and perhaps most difficult, she would have to set aside her belief in naive realism, the almost universal belief that all people define the real world of objects, events, and living creatures in pretty much the same way. Human languages may differ from one society to the next, but behind the strange words and sentences, all people are talking about the same things. The naive realist assumes that love, snow, marriage, worship, animals, death, food, and hundreds of other things have essen- tially the same meaning to all human beings. Although few of us would admit to such ethnocentrism, the assumption may unconsciously influence our research. Ethnog- raphy starts with a conscious attitude of almost complete ignorance: “I don’t know how the people at Macalester College understand their world. That remains to be discovered.”

This Inuit woman would have to begin by learning the language spoken by stu- dents, faculty, and staff. She could stroll the campus paths, sit in classes, and attend special events, but only if she consciously tried to see things from the native point of view would she grasp their perspective. She would need to observe and listen to first- year students during their week-long orientation program. She would have to stand in line during registration, listen to students discuss the classes they hoped to get, and visit departments to watch faculty advising students on course selection. She would want to observe secretaries typing, janitors sweeping, and maintenance personnel plowing snow from walks. She would watch the more than 1,600 students crowd into the post office area to open their tiny mailboxes, and she would listen to their com- ments about junk mail and letters from home or no mail at all. She would attend fac- ulty meetings to watch what went on, recording what professors and administrators said and how they behaved. She would sample various courses, attend “keggers” on weekends, read the Mac Weekly, and listen by the hour to students discussing things like their “relationships,” the “football team,” and “work study.” She would want to learn the meanings of all these things. She would have to listen to the members of this college community, watch what they did, and participate in their activities to learn such meanings.

The essential core of ethnography is this concern with the meaning of actions and events to the people we seek to understand. Some of these meanings are directly expressed in language; many are taken for granted and communicated only indirectly through word and action. But in every society people make constant use of these com- plex meaning systems to organize their behavior, to understand themselves and oth- ers, and to make sense out of the world in which they live. These systems of meaning constitute their culture; ethnography always implies a theory of culture.


When ethnographers study other cultures, they must deal with three fundamental aspects of human experience: what people do, what people know, and the things peo- ple make and use. When each of these is learned and shared by members of some group, we speak of them as cultural behavior, cultural knowledge, and cultural arti- facts. Whenever you do ethnographic fieldwork, you will want to distinguish among these three, although in most situations they are usually mixed together. Let’s try to unravel them.

C H A P T E R 1 Ethnography and Culture 9

Recently I took a commuter train from a western suburb to downtown Chicago. It was late in the day, and when I boarded the train, only a handful of people were scattered about the car. Each was engaged in a common form of cultural behavior: reading. Across the aisle a man held the Chicago Tribune out in front of him, looking intently at the small print and every now and then turning the pages noisily. In front of him a young woman held a paperback book about twelve inches from her face. I could see her head shift slightly as her eyes moved from the bottom of one page to the top of the next. Near the front of the car a student was reading a large textbook and using a pen to underline words and sentences. Directly in front of me I noticed a man looking at the ticket he had purchased and reading it. It took me an instant to survey this scene, and then I settled back, looked out the window, and read a billboard advertisement for a plumbing service proclaiming it would open any plugged drains. All of us were engaged in the same kind of cultural behavior: reading.

This common activity depended on a great many cultural artifacts, the things people shape or make from natural resources. I could see artifacts like books and tickets and newspapers and billboards, all of which contained tiny black marks arranged into intricate patterns called “letters.” And these tiny artifacts were ar- ranged into larger patterns of words, sentences, and paragraphs. Those of us on that commuter train could read, in part, because of still other artifacts: the bark of trees made into paper; steel made into printing presses; dyes of various colors made into ink; glue used to hold book pages together; large wooden frames to hold billboards. If an ethnographer wanted to understand the full cultural meaning in our society, it would involve a careful study of these and many other cultural artifacts.

Although we can easily see behavior and artifacts, they represent only the thin surface of a deep lake. Beneath the surface, hidden from view, lies a vast reservoir of cultural knowledge. Think for a moment what the people on that train needed to know in order to read. First, they had to know the grammatical rules for at least one language. Then they had to learn what the little marks on paper represented. They also had to know the meaning of space and lines and pages. They had learned cultural rules like “move your eyes from left to right, from the top of the page to the bottom.” They had to know that a sentence at the bottom of a page continues on the top of the next page. The man reading a newspaper had to know a great deal about columns and the spaces between columns and what headlines mean. All of us needed to know what kinds of messages were intended by whoever wrote what we read. If a person cannot distinguish the importance of a message on a billboard from one that comes in a letter from a spouse or child, problems would develop. I knew how to recognize when other people were reading. We all knew it was impo- lite to read aloud on a train. We all knew how to feel when reading things like jokes or calamitous news in the paper. Our culture has a large body of shared knowledge that people learn and use to engage in this behavior called reading and make proper use of the artifacts connected with it.

Although cultural knowledge is hidden from view, it is of fundamental impor- tance because we all use it constantly to generate behavior and interpret our expe- rience. Cultural knowledge is so important that I will frequently use the broader term culture when speaking about it. Indeed, I will define culture as the acquired knowledge people use to interpret experience and generate behavior. Let’s consider another example to see how people use their culture to interpret experience and do things.

10 P A R T O N E Culture and Ethnography

One afternoon in 1973 I came across the following news item in the Minneapolis Tribune:

Crowd Mistakes Rescue Attempt, Attacks Police Nov. 23, 1973. Hartford, Connecticut. Three policemen giving a heart massage and oxygen to a heart attack victim Friday were attacked by a crowd of 75 to 100 persons who appar- ently did not realize what the policemen were doing.

Other policemen fended off the crowd of mostly Spanish-speaking residents until an ambulance arrived. Police said they tried to explain to the crowd what they were do- ing, but the crowd apparently thought they were beating the woman.

Despite the policemen’s efforts the victim, Evangelica Echevacria, 59, died.

Here we see people using their culture. Members of two different groups ob- served the same event, but their interpretations were drastically different. The crowd used their cultural knowledge (a) to interpret the behavior of the policemen as cruel and (b) to act on the woman’s behalf to put a stop to what they perceived as brutality. They had acquired the cultural principles for acting and interpreting things in this way through a particular shared experience.

The policemen, on the other hand, used their cultural knowledge (a) to interpret the woman’s condition as heart failure and their own behavior as a life-saving effort and (b) to give her cardiac massage and oxygen. They used artifacts like an oxygen mask and an ambulance. Furthermore, they interpreted the actions of the crowd in an entirely different manner from how the crowd saw their own behavior. The two groups of people each had elaborate cultural rules for interpreting their experience and for acting in emergency situations, and the conflict arose, at least in part, because these cultural rules were so different.

We can now diagram this definition of culture and see more clearly the rela- tionships among knowledge, behavior, and artifacts ( Figure 1 ). By identifying cultural knowledge as fundamental, we have merely shifted the emphasis from behavior and artifacts to their meaning. The ethnographer observes behavior but goes beyond it to inquire about the meaning of that behavior. The ethnographer sees artifacts and natu- ral objects but goes beyond them to discover what meanings people assign to these objects. The ethnographer observes and records emotional states but goes beyond them to discover the meaning of fear, anxiety, anger, and other feelings.

As represented in Figure 1, cultural knowledge exists at two levels of conscious- ness. Explicit culture makes up part of what we know, a level of knowledge people can communicate about with relative ease. When George Hicks asked storekeepers and others in Little Laurel Valley about their relatives, he discovered that any adult over fifty could tell him the genealogical connections among large numbers of peo- ple. They knew how to trace kin relationships and the cultural rules for appropriate behavior among kins. All of us have acquired large areas of cultural knowledge such as this, which we can talk about and make explicit.

At the same time, a large portion of our cultural knowledge remains tacit, out- side our awareness. Edward Hall has done much to elucidate the nature of tacit cultural knowledge in his books The Silent Language and The Hidden Dimension. 4 The way each culture defines space often occurs at the level of tacit knowledge. Hall points out that all of us have acquired thousands of spatial cues about how close to

4 Edward T. Hall, The Silent Language (Garden City, NY: Doubleday, 1959); The Hidden Dimension (Garden City, NY: Doubleday, 1966).

C H A P T E R 1 Ethnography and Culture 11

stand to others, how to arrange furniture, when to touch others, and when to feel cramped inside a room. Without realizing that our tacit culture is operating, we be- gin to feel uneasy when someone from another culture stands too close, breathes on us when talking, touches us, or when we find furniture arranged in the center of the room rather than around the edges. Ethnography is the study of both explicit and tacit cultural knowledge. . . .

The concept of culture as acquired knowledge has much in common with sym- bolic interactionism, a theory that seeks to explain human behavior in terms of mean- ings. Symbolic interactionism has its roots in the work of sociologists like Cooley, Mead, and Thomas. Blumer has identified three premises on which this theory rests.

The first premise is that “human beings act toward things on the basis of the meanings that the things have for them.” 5 The policemen and the crowd in our ear- lier example interacted on the basis of the meanings things had for them. The geo- graphic location, the types of people, the police car, the policemen’s movements, the sick woman’s behavior, and the activities of the onlookers—all were symbols with spe- cial meanings. People did not act toward the things themselves, but to their meanings.

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uiwtx blackboard

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goview usg

The standard normal distribution is referred to as the:

Question 1 options:

Z distribution
np distribution


Question 2 (3 points)




Given that Z is a standard normal variable, the value z for which P(Z z) = 0.2580 is

Question 2 options:



Question 3 (3 points)




is the:

Question 3 options:

rule of opposites
addition rule
rule of complements
commutative rule


Question 4 (3 points)



Which of following statements are true regarding the probability distribution of a random variable X?

Question 4 options:

The probabilities must be nonnegative
The probabilities must sum to 1
The random variable must be continuous
Both (a) and (b)


Question 5 (3 points)



If P(A) = P(A|B), then events A and B are said to be

Question 5 options:

mutually exclusive


Question 6 (3 points)



 The joint probabilities shown in a table with two rows, A1and A2 and two columns, B1 and B2, are as follows: P(A1 and B1) = .10, P(A1 and B2) = .30, P(A2 and B1) = .05, and P(A2 and B2) = .55. Then P(A1|B1), calculated up to two decimals, is

Question 6 options:



Question 7 (3 points)



There are two types of random variables, they are

Question 7 options:

discrete and continuous
real and unreal
complementary and cumulative
exhaustive and mutually exclusive


Question 8 (3 points)



If A and B are mutually exclusive events with P(A) = 0.30 and P(B) = 0.40, then the probability that either A or B or both occur is:

Question 8 options:

None of the above


Question 9 (3 points)



If two events are independent, what is the probability that they both occur?

Question 9 options:

Cannot be determined from the information given.  


Question 10 (3 points)



The binomial distribution can occur in which of the following situations?

whenever we are interested in the number of events that occur over a given interval of time

whenever we sample from a population with only two types of members

whenever we perform a sequence of identical experiments, each of which has only two possible outcomes

Question 10 options:

I only
I and II
II and III
All of the above


Question 11 (3 points)



The binomial probability distribution is used with

Question 11 options:

either a discrete or a continuous random variable, depending on the variance
either a discrete or a continuous random variable, depending on the sample size
a continuous random variable
a discrete random variable


Question 12 (3 points)



A density function acts like a:

Question 12 options:

frequency table


Question 13 (3 points)



One reason for standardizing random variables is to measure variables with:

Question 13 options:

different means and standard deviations on a single scale
different means and standard deviations on a non-standard scale
similar means and standard deviations on two scales


Question 14 (3 points)




The standard deviation of a probability distribution must be:

Question 14 options:

a nonnegative number
a negative number
a number between 0 and 1
All of the above
None of the above  


Question 15 (5 points)



Consider a random variable X with the following probability distribution:   P(X=0) = 0.08, P(X=1) = 0.22, P(X=2) = 0.25, P(X=3) = 0.25, P(X=4) = 0.15, P(X=5) = 0.05 Find the expected value of X and the standard deviation of X.

Question 15 options:

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Question 16 (3 points)



Consider a random variable X with the following probability distribution:   P(X=0) = 0.08, P(X=1) = 0.22, P(X=2) = 0.25, P(X=3) = 0.25, P(X=4) = 0.15, P(X=5) = 0.05 Find P(X > 3)

Question 16 options:

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Question 17 (3 points)




Suppose that 20% of the students of Big Rapids High School play sports. Moreover, assume that 55% of all students are female, and 15% of all female students play sports.   

If we choose a student at random from this school, what is the probability that this student does not play sports?

Question 17 options:

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Question 18 (4 points)



The grades on the final examination given in a large organic chemistry class are normally distributed with a mean of 72 and a standard deviation of 8. The instructor of this class wants to assign an “A” grade to the top 10% of the scores, a “B” grade to the next 10% of the scores, a “C” grade to the next 10% of the scores, a “D” grade to the next 10% of the scores, and an “F” grade to all scores below the 60th percentile of this distribution. For a letter grade of C, find the lowest acceptable score within the established range. Provide your answer in the format XX.X, for example 83.4.

Question 18 options:

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Question 19 (4 points)



The service manager for a new appliances store reviewed sales records of the past 20 sales of new microwaves to determine the number of warranty repairs he will be called on to perform in the next 90 days. Corporate reports indicate that the probability any one of their new microwaves needs a warranty repair in the first 90 days is 0.05. The manager assumes that calls for warranty repair are independent of one another and is interested in predicting the number of warranty repairs he will be called on to perform in the next 90 days for this batch of 20 new microwaves sold.   What is the probability that none of the 20 new microwaves sold will require a warranty repair in the first 90 days?

Question 19 options:

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Question 20 (3 points)



A popular retail store knows that the distribution of purchase amounts by its customers is approximately normal with a mean of $30 and a standard deviation of $9. What is the probability that a randomly selected customer will spend less than $15 at this store?

Question 20 options:

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Question 21 (3 points)



A popular retail store knows that the distribution of purchase amounts by its customers is approximately normal with a mean of $30 and a standard deviation of $9. What is the probability that a randomly selected customer will spend exactly $28 at this store?

Question 21 options:

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Question 22 (3 points)



If X is a normal random variable with a standard deviation of 10, then 3X has a standard deviation equal to

Question 22 options:



Question 23 (2 points)



Given that events A and B are independent and that P(A) = 0.8 and P(B/A) = 0.4, then P(A and B) = 0.32.

Question 23 options:



Question 24 (2 points)



Suppose A and B are two events where P(A) = 0.5, P(B) = 0.4, and P(A and B) = 0.2, then P(B|A) = 0.5.

Question 24 options:



Question 25 (2 points)



The temperature of the room in which you are writing this test is a continuous random variable.

Question 25 options:



Question 26 (2 points)



Two or more events are said to be exhaustive if at most one of them can occur.

Question 26 options:



Question 27 (2 points)



Two events A and B are said to mutually be exclusive if P(A and B) = 0.

Question 27 options:



Question 28 (2 points)



The number of television sets sold on a given day is a continuous random variable.

Question 28 options:



Question 29 (2 points)



The left half under the normal curve is slightly smaller than the right half.

Question 29 options:



Question 30 (2 points)



The binomial distribution is a discrete distribution that deals with a sequence of identical trials, each of which has only two possible outcomes.

Question 30 options:



Question 31 (2 points)



The variance of a binomial distribution for which n = 50 and p = 0.20 is 8.0.

Question 31 options:



Question 32 (2 points)



If Z is a standard normal variable, then P(Z > 1.50) = 0.9332

Question 32 options:



Question 33 (2 points)



If Z is a standard normal variable, then P(Z = 1) = 0.3413.

Question 33 options:



Question 34 (2 points)



Using the standard normal curve, the Z- score representing the 75th percentile is 0.674.

Question 34 options:



Question 35 (3 points)



In a particular community, there are medical doctors in 40% of the households. If a household is chosen at random from this community, what is the probability that there is not a medical doctor in this household?  

Question 35 options:

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Question 36 (3 points)



Researchers studying the effects of a new diet found that the weight loss over a one-month period by those on the diet was normally distributed with a mean of 9 pounds and a standard deviation of 3 pounds.   What proportion of the dieters lost more than 12 pounds?

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icampus strayer edu blackboard

Assignment 1: The Scavenger Hunt

Due Week 3 and worth 100 points

Let’s put your investigative skills to work! In this assignment, visit the Strayer online library located in iCampus or the Resource Center tab in Blackboard and find four (4) peer-reviewed quantitative or qualitative articles related to your topic. Read each article.

Write a three to five (3-5) page paper in which you:

  1. Summarize each article [approximately one to two (1-2) paragraphs per article] and identify the:
    1. Purpose of the research.
    2. Problem statement.
    3. Gaps in literature that studied the problem.
    4. Research question and/or hypotheses.
    5. Theory or conceptual framework.
    6. Findings of the research.
  2. Describe one to two (1-2) aspects of each article that are relevant to the research topic you have chosen.
  3. Provide a preliminary reference page in APA format of the articles you summarized.
  4. Include at least four (4) peer-reviewed quantitative or qualitative articles related to your topic.

Your assignment must follow these formatting requirements:

  • Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA format. Check with your professor for any additional instructions.
  • Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.

The specific course learning outcomes associated with this assignment are:

  • Identify a research topic and describe why it can and should be studied.
  • Determine the appropriateness of peer-reviewed literature to support research topics.
  • Use technology and information resources to research issues related to educational research methods.
  • Use quantitative and / or qualitative approaches to create research topics.
  • Analyze research methodologies that support specific research topics.
  • Describe ethical considerations in the research process.
  • Evaluate components of a research proposal.
  • Write clearly and concisely about educational research methods using proper writing mechanics.
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atd competency model

“Human Resource Development and ATD Competency Model” Please respond to the following:

•Discuss how Human Resource Development can be implemented into organizational strategic planning.

•Review the Association for Talent Development’s (ATD) Competency Model located at Next, discuss at least two of the areas of expertise listed in the ATD Competency Model. Provide examples of how you have observed or experienced successful demonstration of these areas of expertise in the workplace.

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what is a group’s formal and informal means of enforcing norms called?

Movie Assignment: The Matrix

1) Define deviance, explain why it is relative and apply these concepts to the film. Be specific in

your answer.

Deviance simply refers to any violation of norms or rules or expectations. These

violations can range from being very minor to very serious offenses. But different groups have

different norms, so it is important to also consider that deviance is relative. What may be deviant

to some may not be deviant to others. It is not an act itself which is deviant, but rather the

reactions by others in the culture to that act which makes something deviant.

These concepts are evident all throughout the film. Early in the movie you can see two

different groups emerging. One is a “fake” world and one is real. Neo had been having his doubts

about the world with which he was familiar. This computer generated world had its norms and

everyday routines even though it was programmed. When he was contacted by Morpheus, Neo

began to break the norms of the world he was used to by acting irrationally and trying to escape

the agents who also knew that something was out of the norm with Neo. This is where Neo’s

deviant behavior to the computer generated world he grew up in begins and continues throughout

the film.

2) Define social control and identify what methods of social control are utilized in the film.

Social control is developed by different human groups. Social control is a group’s formal

and informal means of enforcing norms. It is a way of preserving order in society and preventing


The robots controlling the Matrix created the agents. These agents worked in the system

to seek and destroy any virus or threat that had hacked into the matrix. This is one way to prevent

deviance from those who were out of the matrix. Another robot came to pluck Neo’s farm body

out of his pod and discard it when it had deviated from its norm of laying there and producing

energy. Another example of social control is how the machines kept their crops of humans under

control by creating a fake or fantasy world to keep them peaceful and not realize the truth.

3) What norms are broken in the movie? The norms can be norms in our world or specific to the

movie world. How does this influence the methods of social control utilized in the film?

The norms broken in the movie world are evident by all those who were able to escape

the false reality they had been fed by the machines. These people had woken up from the

vegetable state they were intended to be in and realized the truth. Many had made it to Zion and

planned to fight back one day against the machines to save mankind. These norms being broken

in the real world caused the machines to create robots that seek out and destroy rogue ships or

humans that exist in the machines’ world that are not being farmed.

Dodging bullets, super jumping abilities, extreme quickness, and superior fighting skills

are just a few of the deviant acts according to our world. When Neo and the others knew they

were just in a computer generated matrix, they could simply download programs to give them

super human capabilities. The machines programmed the equally super human agents to try to

control this deviant behavior.

4) Define the symbolic interactionist theories of deviance and find some aspect of the film that

illustrates each theory.

The differential association theory indicates that we learn to deviate from or conform to

society’s norms based on the different groups that we associate with. Our different groups give us

messages about conformity and deviance and some will learn more about deviance increasing the

likelihood that they will become deviant. Neo had been a conformist his whole life in the dream

world of the matrix. But when he took the red pill and met the others he became a member of a

new group. He was called “the One” by this group. They strongly influenced his mind and body

to behave deviantly toward the machines and the matrix and everything he had known thus far.

Control theory stresses that two control systems work against our motivations to deviate.

One is our inner controls. These are our beliefs of religion, ideas of right and wrong, our

conscience, our morality, our fear of punishment. The other control is outer control. These are

our parents, friends, family, peers, authority, police, etc. Control theory can also be called

self-control. One part of the film illustrates a lack of self control by Cypher. This guy sold out

the whole group to go back to his old dreamworld in the matrix. He deviated from his inner

controls of morality and fear of punishment by his group. He also clearly deviated from his outer

controls of friends, peers, and authority. He even tried to kill the members of his group.

Labeling theory is the view that the labels people are given affect their own and others’

perceptions of them, thus channeling their behavior into either deviance or conformity. The best

example of labeling theory in the movie is how Neo was labeled “the one”. This put a great deal

of pressure on Neo to behave according to what his peers expected of him. In one way he

conforms to his groups norms and expectations. He also deviates severely from the norms of the

machines’ world and the matrix and the expectations of the agents. This label “the one” causes

him to take extreme deviant risks when fighting the agents in many scenes throughout the movie.

It also causes members of his group to look up to him and respect him.

5) Define Robert Merton’s strain theory and outline examples from the film for each of Merton’s

modes of adaptation.

Strain theory refers to the frustrations people feel when they want success but find their

way to it blocked. Society socializes large numbers of people to desire a cultural goal but

withholds from some the approved means of reaching that goal. People have modes of

adaptations to reach these goals.

One adaptation is conformity. The humans being farmed by the machines in the movie

are examples of conformity. They did not wake up and rebel against the norms of the world

created for them. They simply adapted to their dreamworld and laid in their pods producing

energy for the machines.

Innovation is a deviant adaptation where people accept the goals of society but use

illegitimate means to try to reach them. The agents are examples of innovators. They are able to

manipulate any character in the matrix and change into them in order to reach their goal of

weeding out the hackers. They act sort of like con artists in this way.

Ritualism is a deviant adaptation where people have become discouraged and give up on

achieving their cultural goals, yet still cling to conventional rules of conduct. Neo’s attitude,

when he finds out from the oracle that he is not the one, starts to lean toward this complacency of

just being like the others and sort of going with the flow.

Retreatism is evident in people who reject both the cultural goals and the institutionalized

methods of achieving them. Cypher could be considered a retreatist. He had withdrawn from his

group and was willing to turn them all over to the agents in order to go back to his dream world.

He had clearly rejected the goals of the humans and the means of achieving or reaching Zion.

Rebellion is evident in people who also reject both the cultural goals and the

institutionalized methods of achieving them but also seek to give society new goals and a new

means for reaching them. All of the people who took the red pill and rejected the dream world of

the matrix could be considered rebellious. They chose to reject the matrix and return to their own

world which happens to be the “real” world. They rejected the falsehood that the matrix had been

feeding their minds. They sought to reach Zion and other humans and fight to save mankind.

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simple stain microbiology

Structure and Microscopy

Lab 4: Structure and Microscopy (100 points)

Student Name:

Student ID:

Course ID:

-Each question on the lab worksheet must be answered completely, thoroughly, in complete sentences and correctly in order to be considered for full credit

-If the question asks you to do research or find a source, a reputable, credible and/or scholarly source citation must be included in order to be considered for full credit

-If a math formula is required to arrive to an answer, work must be shown otherwise, no credit will be awarded

Pre-Lab Questions

1. What determines if a bacterial cell is Gram-positive or Gram-negative? (5 points)

Amount and location of the peptidoglycan molecule in the prokaryotic cell wall determines whether a bacterial cell is Gram-positive or Gram-negative.

2. In this lab, both viruses and prions were introduced as acellular organisms. Do some research and describe one other type of acellular organism. What characteristics about this organism classify it as acellular? (5 points)

Viroids are another type of acellular organism along with viruses and prions. They are plant pathogens, which consist only of a short strand of circular RNA capable of self-replication.

3. Bacteria have many different shapes that often determine their class. Research and form a hypothesis on the evolutionary reasons for so many different bacterial morphologies. (5 points)

Each bacterial morphology may be a selectable feature to aid survival and may have affected by different physical, environmental, and biological forces to contribute to natural selection.


Young, K. D. (2006, September). The Selective Value of Bacterial Shape. Retrieved September 30, 2018, from

4. Do a search online or look in your textbook for 1-2 antibiotics that affect Gram-positive bacteria and list them. On what part of the cell do the antibiotics usually work? List one or two antibiotics that affect Gram-negative bacteria? On what part of the cell do the antibiotics usually work? (Be sure to cite your sources in your answer.) (5 points)

5. Why do you think it is important to identify a bacterial disease in a patient before prescribing any antibiotic treatments? (Be specific.) (5 points)


Experiment 1 Results Tables

Table 1: Experiment 1 Staining Observations (5 points)

Stain used:Crystal Violet
Observations:Purple rod-shape bacteria with white background were observed

Experiment 1 Post-Lab Questions

1. How does crystal violet enhance the visualization of microbial features? (5 points)

Crystal violet enhances the contrast between the microorganism itself and the slide, making the bacteria appear as purple.

2. What are some of the limitations of simple staining? (5 points)

3. Give an example of a situation in a lab or medical setting in which simple staining would be utilized. (5 points)

Simple staining is used to obtain basic information about morphology of one type of microorganism through clear visualization.

Experiment 2 Results Tables

Table 2: Experiment 2 Staining Observations (5 points)

Stain used:Nigrosin
Observations:Background is stained, bacteria shows up as clear spiral.

Experiment 2 Post-Lab Questions

1. After visualizing the stained samples either using your microscope or by looking at the sample images provided, describe what physical/visual characteristics you were able to observe after performing the negative staining vs. after performing the simple stain. (5 points)

After looking at the sample images provided, negatively stained bacteria showed up as clear straight spirals against a dark background. Bacteria that are simple stained showed up as dark purple rods-shaped with white background.

2. So far in this lab, you have used one type of simple stain and one type of negative stain, yet there are many other simple and negative dyes available. Pick one simple dye and one negative dye, and discuss how those dyes differ from the ones you used in this lab. Give a scenario in which their use would be appropriate. (5 points)

Methylene blue is another dye that can be used for negative stain.

India Ink is another type of negative stain.

Experiment 3 Results Tables

Table 3: Experiment 3 Staining Observations (5 points)

Stain used:Crystal violet (primary stain) & Safranin (counterstain)
Observations:Gram-positive appeared as purple and Gram-negative showed up as pink.

Experiment 3 Post-Lab Questions

1. What color are the Gram-positive bacteria after Gram staining? Gram-negative bacteria? (5 points)

Gram-positive bacteria appear as dark purple or blue due to retaining the primary dye (Crystal Violet) in the cell wall.

Gram-negative bacteria appear as red or pink due to decolorizing to accept the counterstain (Safranin).

2. What different characteristic(s) exist between the two groups that account for the different staining conditions? (5 points)

Gram-positive bacteria are stained purple, and gram-negative bacteria stain as pink. They are two distinct morphological groups of bacteria.

3. Why was the Gram iodine added to the Gram staining procedure? (5 points)

Gram iodine is added as a mordant to stabilize the crystal violet iodine complex so that the dye cannot be removed easily.

4. Why is a counterstain (safranin) added to the Gram staining procedure? (5 points)

A counterstain is used to help identify gram-negative bacteria. Gram-negative bacteria lose the crystal violet and stain red.

5. What are the advantages of performing a Gram stain vs. a simple stain for visualizing bacteria? (5 points)

Gram stain contains two or more different stains and can differentiate the species of bacteria into two main groups (gram-positive and gram-negative) by looking at the color of cells (pink or purple). Simple stain involves single stain and it is used to easily determine cell shape, size, and arrangement.

6. Using either a textbook or a reputable online resource, research some of the typical characteristics of bacteria, and discuss why it might be important for a researcher or a hospital technician to be able to differentiate between Gram-positive and Gram-negative bacteria. (5 points)

7. Did you experience any technical difficulties or atypical results during this experiment? If so, what happened, and how could you avoid these issues in the future? (5 points)

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empleado bienvenido al (1) mecánico óscar. ¿en qué le puedo servir?

eleven Contexts
5  Complete    Complete these sentences with the correct words.
1. To be able to drive legally, you need.2. You can put the suitcases in.3. If your car does not work, you must take it to.4. To fill your car’s tank, you need to go to.5. Before a long trip, it is important to check.6. Another word for highway is.7. While talking on a cell phone, it’s not a good idea.8. Another word for car is.
eleven Contexts
6  Conversation    Complete the conversation with the words in the list.
Oilthe gasfill inthe windshieldthe workshopthe trunkthe tiresdrivecheckthe steering wheelEMPLOYEEWelcome to the mechanic  Óscar . How can I serve him?JUANGood Morning. I want the tank and check, please.EMPLOYEEWith pleasure. If you want, I’ll clean you up, too.JUANYes thanks. It’s a little dirty. Next week I have to Buenos Aires. You can change ? They are worn ( worn ).EMPLOYEEOf course, but I will take ( it will take me ) a couple of hours.JUANBetter return tomorrow. I do not have time now. How much do I owe you for ?EMPLOYEESixty pesos. And twenty five for and change the oil.
Top of FormBottom of Form
eleven ContextsQuizSelect    Choose the word that does not belong ( belongs) to the keyboard to call monitor cederróntwo. workshop Street highway freeway3. drive park delete tearFour. windshield steering wheel tank archive5. to call to download Record to print6 at net circulation surfWrite    Write the correct word for each definition. Use the determined items.7. You use this to direct ( to direct ) the car to the left or right while driving. 8. If you can not talk on the phone with someone, you leave a message here. 9. With this apparatus ( appliance ) you can watch movies. 10. In English, this element of the computer has the name of a small animal. 11. The engine of the car is covered ( covered ) with this. 12. It is a type of portable phone. 13. All cars have four. 14. In this object you can see what you write with the computer. Complete    Complete the sentences with the correct words.ANTONIOLook at the police you put a fine ( fine ).MARISAAnd this time, why? Oh yes … it seems that the car is wrong.ANTONIOCan you help me put the suitcases in it?MARISAYes. Hey, and remember we have to go to it to fill the.ANTONIOOh, and we also have to review the. Mmm … the car does not start.MARISAHere I have my cell phone. If you want, you can use it to call.
eleven Orthography
The accentuation of similar words
one  Practice    Mark the accents in the words that need them.
ANAAlo, I’m Ana. How are you?JUANHello, but … why are you calling me so late?ANABecause tomorrow you have to take me to college. My car is damaged.JUANHow does it hurt?ANAIt hurt on Saturday. A neighbor ( neighbor ) with choco ( Crashed into ) the.
Top of FormBottom of Form
eleven OrthographyThe accentuation of similar wordstwo  Crossword    Use the following clues ( clues ) to complete the puzzle. Be careful with the accents!Horizontal   1. He _____ lifts. 4. I’m not going _____ I can not. 7. You _____ sleeping. 9. ¿_____ is the exam? 10. I want this video and _____.Vertical   2. How _____ you? 3. You are _____ my brother. 5. ¿_____ such? 6. I like _____ sweater. 8. I navigate _____ the network.
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griggs v. duke power company, which prohibits course hero

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Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States

Jeffrey F. Beatty Boston University

Susan S. Samuelson Boston UniversityPet

er P ea

rs o n /S to ck b yt e/ G et ty

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Preface xix

UNIT 1 The Legal Environment 1 1 Introduction to Law 2 2 Ethics and Corporate Social Responsibility 23 3 Dispute Resolution 51 4 Common Law, Statutory Law, and

Administrative Law 83 5 Constitutional Law 109 6 Torts and Product Liability 134 7 Crime 164 8 International Law 190

UNIT 2 Contracts 213 9 Introduction to Contracts 214 10 Agreement 234 11 Consideration 256 12 Legality 276 13 Capacity and Consent 295 14 Written Contracts 316 15 Third Parties 337 16 Performance and Discharge 356 17 Remedies 377 18 Practical Contracts 400

UNIT 3 Commercial Transactions 423 19 Introduction to Sales 424 20 Ownership, Risk, and Warranties 450

21 Performance and Remedies 477 22 Negotiable Instruments 501 23 Secured Transactions 528 24 Bankruptcy 562 25 Agency Law 587

UNIT 4 Employment, Business Organizations and Property 615 26 Employment and Labor Law 616 27 Employment Discrimination 644 28 Starting a Business: LLCs and

Other Options 673 29 Corporations 699 30 Government Regulation: Securities and

Antitrust 732 31 Consumer Protection 754 32 Cyberlaw 782 33 Intellectual Property 805 34 Real and Personal Property 832

Appendix A The Constitution of the United States A1

Appendix B Uniform Commercial Code (Selected Provisions) B1

Glossary G1

Table of Cases T1

Index I1


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Preface xix

UNIT 1 The Legal Environment 1

Chapter 1 Introduction to Law 2 1-1 The Role of Law in Society 3

1-1a Power 3 1-1b Importance 3 1-1c Fascination 3

1-2 Origins of Our Law 4 1-2a English Roots 4 Case Summary: The Oculist’s Case (1329) 5 1-2b Law in the United States 6

1-3 Sources of Contemporary Law 6 1-3a United States Constitution 7 1-3b Statutes 9 1-3c Common Law 9 1-3d Court Orders 10 1-3e Administrative Law 10 1-3f Treaties 10

1-4 Classifications 10 1-4a Criminal and Civil Law 10 1-4b Law and Morality 11

1-5 Jurisprudence 11 1-5a Legal Positivism 11 1-5b Natural Law 12 1-5c Legal Realism 12

1-6 Working with the Book’s Features 13 1-6a Analyzing a Case 13 Case Summary: Kuehn v. Pub Zone 13 1-6b Devil’s Advocate 15 1-6c Exam Strategy 16 1-6d You Be the Judge 16 You Be the Judge: Soldano v. O’Daniels 17

Chapter Conclusion 17 Exam Review 18 Multiple-Choice Questions 19 Essay Questions 20 Discussion Questions 21

Chapter 2 Ethics and Corporate Social Responsibility 23

2-1 Introduction 24 2-2 The Role of Business in Society 26

2-3 Why Be Ethical? 27 2-3a Society as a Whole Benefits from Ethical Behavior 27

2-3b People Feel Better When They Behave Ethically 27

2-3c Unethical Behavior Can Be Very Costly 28 2-4 Theories of Ethics 28

2-4a Utilitarian Ethics 29 2-4b Deontological Ethics 29 2-4c Rawlsian Justice 30 2-4d Front Page Test 30

2-5 Ethics Traps 31 2-5a Money 31 2-5b Rationalization 32 2-5c Conformity 33 2-5d Following Orders 33 2-5e Euphemisms 34 2-5f Lost in a Crowd 34 2-5g Blind Spots 35 2-5h Avoiding Ethics Traps 35

2-6 Lying: A Special Case 36 2-7 Applying the Principles 37

2-7a Personal Ethics in the Workplace 37 2-7b The Organization’s Responsibility to Society 38

2-7c The Organization’s Responsibility to Its Employees 39

2-7d An Organization’s Responsibility to Its Customers 40

2-7e Organization’s Responsibility to Overseas Contract Workers 41

2-8 When the Going Gets Tough 42 2-8a Loyalty 42 2-8b Exit 43 2-8c Voice 43

2-9 Corporate Social Responsibility (CSR) 43

Chapter Conclusion 44 Exam Review 44 Multiple-Choice Questions 46 Essay Questions 47 Discussion Questions 48

Chapter 3 Dispute Resolution 51 3-1 Three Fundamental Areas of Law 52

3-1a Litigation versus Alternative Dispute Resolution 52


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3-2 Court Systems 52 3-2a State Courts 52 Landmark Case: International Shoe Co. v. State of Washington 55

3-2b Federal Courts 56 3-3 Litigation 60

3-3a Pleadings 60 Case Summary: Stinton v. Robin’s Wood, Inc. 65 Case Summary: Jones v. Clinton 67

3-4 Trial 69 3-4a Adversary System 69 3-4b Right to Jury Trial 69 3-4c Voir Dire 69 Case Summary: Pereda v. Parajon 70 3-4d Opening Statements 71 3-4e Burden of Proof 71 3-4f Plaintiff ’s Case 71 3-4g Rules of Evidence 72 3-4h Motion for Directed Verdict 72 3-4i Defendant’s Case 73 3-4j Closing Arguments 73 3-4k Jury Instructions 73 3-4l Verdict 73 3-4m Motions after the Verdict 74

3-5 Appeals 74 3-5a Appeals Court Options 74

3-6 Alternative Dispute Resolution 75 3-6a Negotiation 75 3-6b Mediation 76 3-6c Arbitration 76

Chapter Conclusion 77 Exam Review 78 Multiple-Choice Questions 80 Essay Questions 81 Discussion Questions 82

Chapter 4 Common Law, Statutory Law, and Administrative Law 83

4-1 Common Law 84 4-1a Stare Decisis 84 4-1b Bystander Cases 84 Case Summary: Tarasoff v. Regents of the University of California 85

4-2 Statutory Law 87 4-2a Bills 87 4-2b Discrimination: Congress and the Courts 88 4-2c Debate 89 4-2d Statutory Interpretation 91 Landmark Case: Griggs v. Duke Power Co. 92

4-2e Changing Times 93 4-2f Voters’ Role 93 4-2g Congressional Override 93

4-3 Administrative Law 95 4-3a Background 95 4-3b Classification of Agencies 96

4-4 Power of Agencies 96 4-4a Rulemaking 96 4-4b Investigation 98 Landmark Case: United States v. Biswell 99 4-4c Adjudication 99

4-5 Limits on Agency Power 100 4-5a Statutory Control 100 4-5b Political Control 100 4-5c Judicial Review 100 Case Summary: Federal Communications Commission v. Fox Television Stations, Inc. 101

4-5d Informational Control and the Public 102

Chapter Conclusion 103 Exam Review 104 Multiple-Choice Questions 106 Essay Questions 107 Discussion Questions 108

Chapter 5 Constitutional Law 109 5-1 Government Power 110

5-1a One in a Million 110 5-2 Overview 110

5-2a Separation of Powers 111 5-2b Individual Rights 111

5-3 Power Granted 111 5-3a Congressional Power 111 5-3b Executive Power 115 5-3c Judicial Power 115 Case Summary: Kennedy v. Louisiana 116

5-4 Protected Rights 117 5-4a Incorporation 118 5-4b First Amendment: Free Speech 118 Case Summary: Texas v. Johnson 119 Case Summary: Citizens United v. Federal Election Commission 120

Case Summary: Salib v. City of Mesa 121 5-4c Fifth Amendment: Due Process and the Takings Clause 122

Case Summary: Kelo v. City of New London, Connecticut 125

5-4d Fourteenth Amendment: Equal Protection Clause 126


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Chapter Conclusion 129 Exam Review 129 Multiple-Choice Questions 131 Essay Questions 132 Discussion Questions 133

Chapter 6 Torts and Product Liability 134 6-1 Intentional Torts 136

6-1a Defamation 136 6-1b False Imprisonment 139 6-1c Intentional Infliction of Emotional Distress 139

Case Summary: Jane Doe and Nancy Roe v. Lynn Mills 140

6-1d Additional Intentional Torts 140 6-2 Damages 140

6-2a Compensatory Damages 140 6-2b Punitive Damages 142 Landmark Case: State Farm v. Campbell 143

6-3 Business Torts 144 6-3a Tortious Interference with Business Relations 144

6-3b Privacy and Publicity 145 6-4 Negligence 146

6-4a Duty of Due Care 146 Case Summary: Hernandez v. Arizona Board of Regents 147

6-4b Breach of Duty 149 6-4c Causation 149 6-4d Damages 151

6-5 Defenses 152 6-5a Contributory and Comparative Negligence 152

6-5b Assumption of the Risk 153 Case Summary: Truong v. Nguyen 154

6-6 Strict Liability 154 6-6a Ultrahazardous Activity 155 6-6b Product Liability 155

Chapter Conclusion 157 Exam Review 157 Multiple-Choice Questions 160 Essay Questions 161 Discussion Questions 162

Chapter 7 Crime 164 7-1 The Differences between a Civil and Criminal

Case 165 7-1a Prosecution 165

7-1b Burden of Proof 166 7-1c Right to a Jury 166 7-1d Felony/Misdemeanor 166

7-2 Criminal Procedure 166 7-2a Conduct Outlawed 166 7-2b State of Mind 167 7-2c Gathering Evidence: The Fourth Amendment 167

You Be the Judge: Ohio v. Smith 169 7-2d The Case Begins 171 Landmark Case: Miranda v. Arizona 172 7-2e Right to a Lawyer 173 7-2f After Arrest 173 Case Summary: Ewing v. California 174

7-3 Crimes that Harm Business 176 7-3a Larceny 176 7-3b Fraud 176 Case Summary: Skilling v. United States 177 7-3c Arson 179 7-3d Embezzlement 179

7-4 Crimes Committed by Business 179 Case Summary: Commonwealth v. Angelo Todesca Corp. 179

7-4a Selected Crimes Committed by Business 180

7-4b Punishing a Corporation 183

Chapter Conclusion 184 Exam Review 184 Multiple-Choice Questions 186 Essay Questions 187 Discussion Questions 188

Chapter 8 International Law 190 8-1 Trade Regulation: The Big Picture 191

8-1a Export Controls 191 8-1b Import Controls 192 You Be the Judge: Totes-Isotoner Co. v. United States 192

8-1c Treaties 193 Case Summary: United States—Import Prohibition of Certain Shrimp and Shrimp Products 194

8-2 International Sales Agreements 197 8-2a The Sales Contract 197 Case Summary: Centrifugal Casting Machine Co., Inc. v. American Bank & Trust Co. 200

8-3 International Trade Issues 201 8-3a Repatriation of Profits 201


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8-3b Expropriation 201 8-3c Foreign Corrupt Practices Act 202 Case Summary: United States v. King 203 8-3d Extraterritoriality 205 You Be the Judge: Carnero v. Boston Scientific Corporation 205

Chapter Conclusion 206 Exam Review 207 Multiple-Choice Questions 209 Essay Questions 210 Discussion Questions 211

UNIT 2 Contracts 213

Chapter 9 Introduction to Contracts 214 9-1 Contracts 215

9-1a Elements of a Contract 215 9-1b Other Important Issues 215 9-1c All Shapes and Sizes 216 9-1d Contracts Defined 216 9-1e Development of Contract Law 217 Case Summary: Davis v. Mason 217

9-2 Types of Contracts 218 9-2a Bilateral and Unilateral Contracts 218 9-2b Executory and Executed Contracts 219 9-2c Valid, Unenforceable, Voidable, and Void Agreements 219

Case Summary: Mr. W Fireworks, Inc. v. Ozuna 220

9-2d Express and Implied Contracts 220 You Be the Judge: DeMasse v. ITT Corporation 221

9-2e Promissory Estoppel and Quasi- Contracts 222

Case Summary: Norton v. Hoyt 223 9-3 Sources of Contract Law 225

9-3a Common Law 225 9-3b Uniform Commercial Code 225 Case Summary: Fallsview Glatt Kosher Caterers, Inc. v. Rosenfeld 226

Chapter Conclusion 227 Exam Review 227 Multiple-Choice Questions 230 Essay Questions 231 Discussion Questions 233

Chapter 10 Agreement 234 10-1 Meeting of the Minds 235 10-2 Offer 236

10-2a Statements That Usually Do Not Amount to Offers 236

Landmark Case: Carlill v. Carbolic Smoke Ball Company 238

10-2b Problems with Definiteness 239 Case Summary: Baer v. Chase 240 10-2c The UCC and Open Terms 241 10-2d Termination of Offers 242 Case Summary: Nadel v. Tom Cat Bakery 242

10-3 Acceptance 244 10-3a Mirror Image Rule 244 10-3b UCC and the Battle of Forms 245 10-3c Clickwraps and Shrinkwraps 247 Case Summary: Specht v. Netscape Communications Corporation 247

10-3d Communication of Acceptance 249 Case Summary: Soldau v. Organon, Inc. 250

Chapter Conclusion 250 Exam Review 250 Multiple-Choice Questions 253 Essay Questions 254 Discussion Questions 255

Chapter 11 Consideration 256 11-1 What Is Consideration? 257

11-1a What Is Value? 257 Landmark Case: Hamer v. Sidway 258 You Be the Judge: Kim v. Son 259 11-1b Adequacy of Consideration 259 11-1c Illusory Promises 260

11-2 Applications of Consideration 261 11-2a The UCC: Consideration in Requirements and Output Contracts 261

11-2b Preexisting Duty 262 YouBe the Judge:CitizensTrustBankv.White 263

11-3 Settlement of Debts 265 11-3a Liquidated Debt 265 11-3b Unliquidated Debt: Accord and Satisfaction 265

Case Summary: Henches v. Taylor 266 11-4 Consideration: Trends 267

11-4a Employment Agreements 267 Case Summary: Snider Bolt & Screw v. Quality Screw & Nut 268

11-4b Promissory Estoppel and “Moral Consideration” 268


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Chapter Conclusion 269 Exam Review 269 Multiple-Choice Questions 272 Essay Questions 273 Discussion Questions 274

Chapter 12 Legality 276 12-1 Contracts That Violate a Statute 277

12-1a Wagers 277 12-1b Insurance 278 12-1c Licensing Statutes 278 Case Summary: Authentic Home Improvements v. Mayo 279

12-1d Usury 279 Case Summary: American Express Travel Related Services Company, Inc. v. Assih 280

12-2 Contracts That Violate Public Policy 281 12-2a Restraint of Trade: Noncompete Agreements 281

Case Summary: King v. Head Start Family Hair Salons, Inc. 281

12-2b The Legality of Noncompetition Clauses (Noncompetes) 283

12-2c Exculpatory Clauses 284 You Be the Judge: Ransburg v. Richards 285 12-2d Unconscionable Contracts 287 Case Summary: Worldwide Insurance v. Klopp 288

Chapter Conclusion 289 Exam Review 289 Multiple-Choice Questions 291 Essay Questions 292 Discussion Questions 294

Chapter 13 Capacity and Consent 295 13-1 Capacity 296

13-1a Minors 296 13-1b Mentally Impaired Persons 298 Landmark Case: Babcock v. Engel 299

13-2 Reality of Consent 300 13-2a Fraud 300 Case Summary: Hess v. Chase Manhattan Bank, USA, N.A. 304

13-2b Mistake 305 Case Summary: Donovan v. RRL Corporation 306

13-2c Duress 307 You Be the Judge: In Re RLS Legal Solutions, LLC 308

13-2d Undue Influence 309 Case Summary: Sepulveda v. Aviles 310

Chapter Conclusion 310 Exam Review 311 Multiple-Choice Questions 313 Essay Questions 314 Discussion Questions 315

Chapter 14 Written Contracts 316 Landmark Case: The Lessee of Richardson v. Campbell 317

14-1 Common Law Statute of Frauds: Contracts That Must Be in Writing 319

14-1a Agreements for an Interest in Land 319 14-1b Agreements That Cannot Be Performed within One Year 321

You Be the Judge: Sawyer v. Mills 321 14-1c Promise to Pay the Debt of Another 322 14-1d Promise Made by an Executor of an Estate 323

14-1e Promise Made in Consideration of Marriage 323

14-2 The Common Law Statute of Frauds: What the Writing Must Contain 323

14-2a Signature 324 14-2b Reasonable Certainty 324 14-2c Electronic Contracts and Signatures 326

14-3 The UCC’s Statute of Frauds 326 14-3a UCC §2-201(1)—The Basic Rule 326 14-3b UCC §2-201(2)—The Merchants’ Exception 327

Case Summary: Seton Co. v. Lear Corp. 328 14-3c UCC §2-201(3)—Special Circumstances 328

14-4 Parol Evidence 329 Case Summary: Mayo v. North Carolina State University 330

14-4a Exception: An Incomplete orAmbiguous Contract 331

14-4b Fraud, Misrepresentation, or Duress 331

Chapter Conclusion 331 Exam Review 332 Multiple-Choice Questions 334 Essay Questions 335 Discussion Questions 336


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Chapter 15 Third Parties 337 15-1 Third Party Beneficiary 338

15-1a Intended Beneficiaries 338 Case Summary: Schauer v. Mandarin Gems of California, Inc. 339

15-1b Incidental Beneficiaries 340 Case Summary: Unite Here Local 30 v. California Department of Parks and Recreation 340

15-2 Assignment and Delegation 341 15-2a Assignment 341 Case Summary: Tenet HealthSystem Surgical, L.L.C. v. Jefferson Parish Hospital Service District No. 1 343

You Be the Judge: Wells Fargo Bank Minnesota v. BrooksAmerica Mortgage Corporation 346

15-2b Delegation of Duties 347 Case Summary: Rosenberg v. Son, Inc. 349

Chapter Conclusion 350 Exam Review 350 Multiple-Choice Questions 352 Essay Questions 353 Discussion Questions 355

Chapter 16 Performance and Discharge 356 16-1 Conditions 358

16-1a How Conditions Are Created 358 16-1b Types of Conditions 359 Case Summary: American Electronic Components, Inc. v. Agere Systems, Inc. 359

You Be The Judge: Anderson v. Country Life Insurance Co. 361

16-2 Performance 362 16-2a Strict Performance and Substantial Performance 363

16-2b Personal Satisfaction Contracts 364 16-2c Good Faith 365 Case Summary: Brunswick Hills Racquet Club Inc. v. Route 18 Shopping Center Associates 365

16-2d Time of the Essence Clauses 367 16-3 Breach 367

16-3a Material Breach 367 Case Summary: O’Brien v. Ohio State University 368

16-3b Anticipatory Breach 368 16-3c Statute of Limitations 369

16-4 Impossibility 369 16-4a True Impossibility 369 16-4b Commercial Impracticability and Frustration of Purpose 370

Chapter Conclusion 371 Exam Review 371 Multiple-Choice Questions 373 Essay Questions 374 Discussion Questions 376

Chapter 17 Remedies 377 17-1 Breaching a Contract 378

17-1a Identifying the “Interest” to Be Protected 378

17-2 Expectation Interest 379 Landmark Case: Hawkins v. McGee 379 17-2a Direct Damages 381 17-2b Consequential Damages 381 Case Summary: Hadley v. Baxendale 381 You Be the Judge: Bi-Economy Market, Inc. v. Harleysville Ins. Co. of New York 382

17-2c Incidental Damages 383 17-2d The UCC and Damages 383

17-3 Reliance Interest 385 17-3a Promissory Estoppel 386 Case Summary: Toscano v. Greene Music 386

17-4 Restitution Interest 387 17-4a Restitution in Cases of a Voidable Contract 388

Case Summary: Putnam Construction & Realty Co. v. Byrd 388

17-4b Restitution in Cases of a Quasi-Contract 389

17-5 Other Remedies 389 17-5a Specific Performance 389 17-5b Injunction 390 Case Summary: Milicic v. Basketball Marketing Company, Inc. 391

17-5c Reformation 392 17-6 Special Issues 392

17-6a Mitigation of Damages 392 17-6b Nominal Damages 392 17-6c Liquidated Damages 392

Chapter Conclusion 394 Exam Review 394 Multiple-Choice Questions 396 Essay Questions 397 Discussion Questions 399


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Chapter 18 Practical Contracts 400 18-1 The Lawyer 401

18-1a Lawyers and Clients 402 18-1b Hiring a Lawyer 402

18-2 The Contract 403 18-2a Who Drafts It? 403 18-2b How to Read a Contract 403 18-2c Mistakes 403 You Be the Judge: Quake Construction, Inc. v. American Airlines, Inc. 404

Case Summary: Cipriano v. Patrons Mutual Insurance Company of Connecticut 406

You Be the Judge: Heritage Technologies v. Phibro-Tech 408

18-2d The Structure of a Contract 409 Case Summary: Lemond Cycling, Inc. v. PTI Holding, Inc. 413

Chapter Conclusion 418 Exam Review 419 Multiple-Choice Questions 421 Essay Questions 421 Discussion Questions 422

UNIT 3 Commercial Transactions 423

Chapter 19 Introduction to Sales 424 19-1 Development of Commercial Law 425

19-1a Harold and Maude, Revisited 427 19-1b This Unit and This Chapter 427

19-2 UCC Basics 428 19-2a Code’s Purpose 428 19-2b Scope of Article 2 428 19-2c Mixed Contracts 429 19-2d Merchants 429 19-2e Good Faith and Unconscionability 429

19-3 Contract Formation 430 19-3a Formation Basics: §2-204 430 Case Summary: Jannusch v. Naffziger 431 19-3b Statute of Frauds 431 Case Summary: Delta Star, Inc. v. Michael’s Carpet World 433

19-3c Added Terms: §2-207 433 Case Summary: Superior Boiler Works, Inc. v. R. J. Sanders, Inc. 436

19-3d Open Terms: §§2-305 and 2-306 437

Case Summary: Mathis v. Exxon Corporation 438

You Be the Judge: Lohman v. Wagner 440 19-3e Modification 441

Chapter Conclusion 444 Exam Review 444 Multiple-Choice Questions 447 Essay Questions 448 Discussion Questions 449

Chapter 20 Ownership, Risk, and Warranties 450

20-1 Legal Interest 451 20-2 Identification, Title, and Insurable Interest 452

20-2a Existence and Identification 452 20-2b Passing of Title 453 20-2c Insurable Interest 454 Case Summary: Valley Forge Insurance Co. v. Great American Insurance Co. 455

20-3 Imperfect Title 455 20-3a Bona Fide Purchaser 455 Case Summary: Bakalar v. Vavra 457 20-3b Entrustment 457

20-4 Risk of Loss 458 20-4a Shipping Terms 459 20-4b When the Parties Fail to Allocate the Risk 459

Case Summary: Harmon v. Dunn 463 20-5 Warranties 463 20-6 Express Warranties 464

20-6a Affirmation of Fact or Promise 464 20-6b Description of Goods 464 20-6c Sample or Model 465 20-6d Basis of Bargain 465

20-7 Implied Warranties 465 20-7a Implied Warranty of Merchantability 465 CaseSummary:Goodmanv.WencoFoods, Inc. 466 20-7b Implied Warranty of Fitness for a Particular Purpose 467

20-7c Warranty of Title 467 20-8 Disclaimers and Defenses 468

20-8a Disclaimers 468 20-8b Remedy Limitations 469 20-8c Privity 470 Case Summary: Reed v. City of Chicago 471 20-8d Buyer’s Misuse 472


Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Chapter Conclusion 472 Exam Review 472 Multiple-Choice Questions 473 Essay Questions 474 Discussion Questions 476

Chapter 21 Performance and Remedies 477 21-1 Obligation on All Parties: Good Faith 478 21-2 Seller’s Rights and Obligations 478

21-2a Perfect Tender Rule 479 21-2b Restrictions on the Perfect Tender Rule 479

Case Summary: Zion Temple First Pentecostal Church of Cincinnati, Ohio, Inc. v. Brighter Day Bookstore & Gifts & Murphy Cap & Gown Co. 481

You Be the Judge: United Aluminum Corporation v. Linde, Inc. 483

21-3 Buyer’s Rights and Obligations 485 21-3a Inspection and Acceptance 485 Case Summary: Lile v. Kiesel 486

21-4 Seller’s Remedies 487 21-4a Stop Delivery 487 21-4b Identify Goods to the Contract 487 21-4c Resale 487 21-4d Damages for Non-Acceptance 488 21-4e Action for the Price 489

21-5 Buyer’s Remedies 489 21-5a Incidental Damages and Consequential Damages 490

Case Summary: Smith v. Penbridge Associates, Inc. 490

21-5b Specific Performance 491 21-5c Cover 491 Case Summary: Hessler v. Crystal Lake Chrysler-Plymouth, Inc. 492

21-5d Non-Delivery 493 21-5e Acceptance of Non-Conforming Goods 493 21-5f Liquidated Damages 493

Chapter Conclusion 494 Exam Review 494 Multiple-Choice Questions 498 Essay Questions 499 Discussion Questions 500

Chapter 22 Negotiable Instruments 501 22-1 Commercial Paper 502 22-2 Types of Negotiable Instruments 502

22-3 The Fundamental “Rule” of Commercial Paper 503

22-3a Negotiable 503 You Be the Judge: Blasco v. Money Services Center 506

22-3b Negotiated 506 22-3c Holder in Due Course 507 Case Summary: Buckeye Check Cashing, Inc. v. Camp 508

22-3d Defenses against a Holder in Due Course 509

22-3e Consumer Exception 510 Case Summary: Antuna v. Nescor, Inc. 510

22-4 Liability for Negotiable Instruments 511 22-4a Primary versus Secondary Liability 511

22-5 Signature Liability 511 22-5a Maker 511 22-5b Drawer 511 22-5c Drawee 512 22-5d Indorser 513 22-5e Accommodation Party 513

22-6 Warranty Liability 514 22-6a Basic Rules of Warranty Liability 514 22-6b Transfer Warranties 515 You Be the Judge: Quimby v. Bank of America 516

22-6c Comparison of Signature Liability and Transfer Warranties 517

22-6d Presentment Warranties 517 22-7 Other Liability Rules 518

22-7a Conversion Liability 518 22-7b Impostor Rule 519 22-7c Fictitious Payee Rule 519 22-7d Employee Indorsement Rule 519 22-7e Negligence 520

Chapter Conclusion 521 Exam Review 521 Multiple-Choice Questions 525 Essay Questions 526 Discussion Questions 527

Chapter 23 Secured Transactions 528 23-1 Article 9: Terms and Scope 529

23-1a Article 9 Vocabulary 529 23-1b Scope of Article 9 530

23-2 Attachment of a Security Interest 532 23-2a Agreement 533 23-2b Control and Possession 533


Copyr igh t 2013 Cengage Lea rn ing . A l l R igh t s Rese rved . May no t be cop ied , s canned , o r dup l i ca t ed , i n who le o r i n pa r t . Due to e l ec t ron i c r i gh t s , some th i rd pa r ty con ten t may be suppre s sed f rom the eBook and /o r eChap te r ( s ) . Ed i to r i a l r ev i ew has deemed tha t any suppre s sed con ten t does no t ma te r i a l l y a ff ec t t he ove ra l l l e a rn ing expe r i ence . Cengage Lea rn ing r e se rves t he r i gh t t o r emove add i t i ona l con ten t a t any t ime i f subsequen t r i gh t s r e s t r i c t i ons r equ i r e i t .

Case Summary: In Re CFLC, Inc. 534 23-2c Value 535 23-2d Debtor Rights in the Collateral 535 23-2e Attachment to Future Property 535

23-3 Perfection 536 23-3a Nothing Less than Perfection 536 23-3b Perfection by Filing 536 Case Summary: Corona Fruits & Veggies, Inc. v. Frozsun Foods, Inc. 538

23-3c Perfection by Possession or Control 540 Case Summary: Layne v. Bank One 541 23-3d Perfection of Consumer Goods 542 23-3e Perfection of Movable Collateral and Fixtures 544

23-4 Protection of Buyers 545 23-4a Buyers in Ordinary Course of Business 546 You Be the Judge: Conseco Finance Servicing Corp. v. Lee 547

23-4b Buyers of Consumer Goods 547 23-4c Buyers of Chattel Paper, Instruments, and Documents 548

23-4d Liens 549 23-5 Priorities Among Creditors 550

23-5a Filing versus Control or Possession 551 23-5b Priority Involving a Purchase Money Security Interest 552

Case Summary: In Re Roser 553 23-6 Default and Termination 553

23-6a Default 553 23-6b Termination 556

Chapter Conclusion 556 Exam Review 556 Multiple-Choice Questions 559 Essay Questions 560 Discussion Questions 561

Chapter 24 Bankruptcy 562 24-1 Overview of the Bankruptcy Code 563

24-1a Rehabilitation 563 24-1b Liquidation 564 24-1c Chapter Description 564 24-1d Goals 564

24-2 Chapter 7 Liquidation 564 24-2a Filing a Petition 565 24-2b Trustee 566 24-2c Creditors 566 24-2d Automatic Stay 567 Case Summary: Jackson v. Holiday Furniture 567 24-2e Bankruptcy Estate 568

24-2f Payment of Claims 570 24-2g Discharge 572 Case Summary: In Re Stern 573 Case Summary: In Re Grisham 575

24-3 Chapter 11 Reorganization 576 24-3a Debtor in Possession 576 24-3b Creditors’ Committee 576 24-3c Plan of Reorganization 577 24-3d Confirmation of the Plan 577 Case Summary: In Re Fox 577 24-3e Discharge 578 24-3f Small-Business Bankruptcy 579

24-4 Chapter 13 Consumer Reorganizations 579 You Be the Judge: Marrama v. Citizens Bank of Massachusetts 579

24-4a Beginning a Chapter 13 Case 580 24-4b Plan of Payment 580 24-4c Discharge 581

Chapter Conclusion 581 Exam Review 582 Multiple-Choice Questions 583 Essay Questions 584 Discussion Questions 585

Chapter 25 Agency Law 587 25-1 Creating an Agency Relationship 588

25-1a Consent 588 25-1b Control 589 25-1c Fiduciary Relationship 589 25-1d Elements Not Required for an Agency Relationship 589

25-2 Duties of Agents to Principals 590 25-2a Duty of Loyalty 590 Case Summary: Otsuka v. Polo Ralph Lauren Corporation 590

Case Summary: Abkco Music, Inc. v. Harrisongs Music, Ltd. 591

25-2b Other Duties of an Agent 593 25-2c Principal’s Remedies When the Agent Breaches a Duty 594

25-3 Duties of Principals to Agents 595 25-3a Duty to Cooperate 596

25-4 Terminating an Agency Relationship 596 25-4a Termination by Agent or Principal 596 25-4b Principal or Agent Can No Longer Perform Required Duties 597

25-4c Change in Circumstances 598 25-4d Effect of Termination 598

25-5 Liability 599


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25-6 Principal’s Liability for Contracts 599 25-6a Authority 599 25-6b Ratification 600 25-6c Subagents 601

25-7 Agent’s Liability for Contracts 601 25-7a Fully Disclosed Principal 601 25-7b Unidentified Principal 602 25-7c Undisclosed Principal 602 25-7d Unauthorized Agent 603

25-8 Principal’s Liability for Torts 604 25-8a Employee 604 25-8b Scope of Employment 605 You Be the Judge: Zankel v. United States of America 606

25-8c Intentional Torts 607 Case Summary: Doe v. Liberatore 607 25-8d Physical or Nonphysical Harm 608

25-9 Agent’s Liability for Torts 609

Chapter Conclusion 609 Exam Review 609 Multiple-Choice Questions 612 Essay Questions 613 Discussion Questions 614

UNIT 4 Employment, Business Organizations and Property 615

Chapter 26 Employment and Labor Law 616 26-1 Introduction 617 26-2 Employment Security 618

26-2a Family and Medical Leave Act 618 Case Summary: Peterson v. Exide Technologies 618

26-2b Health Insurance 619 26-2c Common Law Protections 619 Case Summary: Kozloski v. American Tissue Services Foundation 621

26-2d Whistleblowing 624 26-3 Privacy in the Workplace 626

26-3a Lifestyle Laws 626 You Be the Judge: Rodrigues v. Scotts Lawnservice 627

26-4 Workplace Safety 630 26-5 Financial Protection 630

26-5a Fair Labor Standards Act: Minimum Wage, Overtime, and Child Labor 631

26-5b Workers’ Compensation 631 26-5c Social Security 631 26-5d Pension Benefits 632

26-6 Labor Law and Collective Bargaining 632 26-6a Key Pro-Union Statutes 632 26-6b Labor Unions Today 633 26-6c Organizing a Union 633 26-6d Collective Bargaining 635 Landmark Case: NLRB v. Truitt Manufacturing Co. 636

26-6e Concerted Action 636

Chapter Conclusion 638 Exam Review 638 Multiple-Choice Questions 641 Essay Questions 642 Discussion Questions 643

Chapter 27 Employment Discrimination 644 27-1 Introduction 645 27-2 The United States Constitution 646 27-3 Civil Rights Act of 1866 646 27-4 Title VII of the Civil Rights Act of 1964 646

27-4a Prohibited Activities 646 You Be the Judge: Jespersen v. Harrah’s 647 Landmark Case: Griggs v. Duke Power Co. 648 Case Summary: Teresa Harris v. Forklift Systems, Inc. 650

27-4b Religion 652 27-4c Sex 652 27-4d Family Responsibility Discrimination 653 27-4e Sexual Orientation 653 27-4f Gender Identity 653 27-4g Defenses to Charges of Discrimination 654

27-5 Equal Pay Act of 1963 656 27-6 Pregnancy Discrimination Act 656 27-7 Age Discrimination in Employment Act 656

27-7a Disparate Treatment 657 Case Summary: Reid v. Google, Inc. 657 27-7b Disparate Impact 658 27-7c Hostile Work Environment 658 27-7d Bona Fide Occupational Qualification 659

27-8 Discrimination on the Basis of Disability 659 27-8a The Rehabilitation Act of 1973 659 27-8b Americans with Disabilities Act 660 Case Summary: Allen v. SouthCrest Hospital 660

27-9 Genetic Information Nondiscrimination Act 664 27-10 Enforcement 664

27-10a Constitutional Claims 664


Copyr igh t 2013 Cengage Lea rn ing . A l l R igh t s Rese rved . May no t be cop ied , s canned , o r dup l i ca t ed , i n who le o r i n pa r t . Due to e l ec t ron i c r i gh t s , some th i rd pa r ty con ten t may be suppre s sed f rom the eBook and /o r eChap te r ( s ) . Ed i to r i a l r ev i ew has deemed tha t any suppre s sed con ten t does no t ma te r i a l l y a ff ec t t he ove ra l l l e a rn ing expe r i ence . Cengage Lea rn ing r e se rves t he r i gh t t o r emove add i t i ona l con ten t a t any t ime i f subsequen t r i gh t s r e s t r i c t i ons r equ i r e i t .

27-10b The Civil Rights Act of 1866 664 27-10c The Rehabilitation Act of 1973 664 27-10d Other Statutory Claims 664

Chapter Conclusion 666 Exam Review 666 Multiple-Choice Questions 669 Essay Questions 671 Discussion Questions 671

Chapter 28 Starting a Business: LLCs and Other Options 673

28-1 Sole Proprietorships 674 28-2 Corporations 675

28-2a Corporations in General 675 28-2b S Corporations 677 28-2c Close Corporations 678

28-3 Limited Liability Companies 679 You Be the Judge: Ridgaway v. Silk 680 Case Summary:, LLC v. Lieberman 681

Case Summary: BLD Products, Ltd. v. Technical Plastics of Oregon, LLC 682

Case Summary: Tzolis v. Wolff 683 28-4 Socially Conscious Organizations 685 28-5 General Partnerships 685

Case Summary: Marsh v. Gentry 687 28-6 Limited Liability Partnerships 688 28-7 Limited Partnerships and Limited Liability

Limited Partnerships 689 28-8 Professional Corporations 690 28-9 Joint Ventures 691

28-10 Franchises 691 Case Summary: National Franchisee Association v. Burger King Corporation 693

Chapter Conclusion 693 Exam Review 694 Multiple-Choice Questions 695 Essay Questions 696 Discussion Questions 697

Chapter 29 Corporations 699 29-1 Promoter’s Liability 700 29-2 Incorporation Process 700

29-2a Where to Incorporate? 700 29-2b The Charter 701

29-3 After Incorporation 704 29-3a Directors and Officers 704

29-3b Bylaws 705 29-3c Issuing Debt 705

29-4 Death of the Corporation 705 29-4a Piercing the Corporate Veil 706 Case Summary: Brooks v. Becker 706 29-4b Termination 707

29-5 The Role of Corporate Management 707 29-6 The Business Judgment Rule 708

29-6a Duty of Loyalty 709 29-6b Corporate Opportunity 709 Case Summary: Anderson v. Bellino 710 29-6c Duty of Care 712

29-7 The Role of Shareholders 713 29-7a Rights of Shareholders 714 Case Summary: Brehm v. Eisner 722 You Be the Judge: eBay Domestic Holdings, Inc. v. Newmark 723

29-8 Enforcing Shareholder Rights 724 29-8a Derivative Lawsuits 724 29-8b Direct Lawsuits 725

Chapter Conclusion 725 Exam Review 725 Multiple-Choice Questions 728 Essay Questions 729 Discussion Questions 730

Chapter 30 Government Regulation: Securities and Antitrust 732

30-1 Securities Laws 733 30-1a What Is a Security? 733 30-1b Securities Act of 1933 733 30-1c Securities Exchange Act of 1934 735 Case Summary: Matrixx Initiatives, Inc. v. Siracusano 736

30-1d Short-Swing Trading—Section 16 737 30-1e Insider Trading 737 Case Summary: Securities and Exchange Commission v. Steffes 739

30-1f Blue Sky Laws 740 30-2 Antitrust Law 740

30-2a The Sherman Act 741 Landmark Case: United States v. Trenton Potteries Company 741

Case Summary: Leegin Creative Leather Products, Inc. v. PSKS, Inc. 742

30-2b The Clayton Act 745 Landmark Case: United States v. Waste Management, Inc. 745

30-2c The Robinson-Patman Act 747


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Chapter Conclusion 748 Exam Review 748 Multiple-Choice Questions 751 Essay Questions 752 Discussion Questions 752

Chapter 31 Consumer Protection 754 31-1 Introduction 755

31-1a Federal Trade Commission 755 31-1b Consumer Financial Protection Bureau 756

31-2 Sales 756 31-2a Deceptive Acts or Practices 756 Case Summary: Federal Trade Commission v. Direct Marketing Concepts, Inc. 756

31-2b Unfair Practices 757 31-2c Additional Sales Rules 758

31-3 Consumer Credit 759 31-3a Truth in Lending Act—General Provisions 760

31-3b Home Loans 761 31-3c Credit Cards 763 Case Summary: Gray v. American Express Co. 766

31-3d Debit Cards 766 31-3e Credit Reports 767 31-3f Debt Collection 769 You Be the Judge: Brown v. Card Service Center 770

31-3g Equal Credit Opportunity Act 771 Case Summary: Treadway v. Gateway Chevrolet Oldsmobile Inc. 771

31-3h Consumer Leasing Act 772 31-4 Magnuson-Moss Warranty Act 773 31-5 Consumer Product Safety 774

Chapter Conclusion 774 Exam Review 774 Multiple-Choice Questions 778 Essay Questions 779 Discussion Questions 781

Chapter 32 Cyberlaw 782 32-1 Privacy 784

32-1a Tracking Tools 784 32-1b Regulation of Online Privacy 785 You Be the Judge: Juzwiak v. John/Jane Doe 786 Case Summary: United States of America v. Angevine 787

Case Summary: United States of America v. Warshak 788

You Be the Judge: Scott v. Beth Israel Medical Center Inc. 791

32-2 Spam 792 32-3 Internet Service Providers and Web Hosts:

Communications Decency Act of 1996 793 Case Summary: Carafano v. Metrosplash .com, Inc. 794

32-4 Crime on the Internet 795 32-4a Hacking 795 32-4b Fraud 797

Chapter Conclusion 799 Exam Review 800 Multiple-Choice Questions 802 Essay Questions 803 Discussion Questions 804

Chapter 33 Intellectual Property 805 33-1 Introduction 806 33-2 Patents 806

33-2a Types of Patents 806 33-2b Requirements for a Patent 808 33-2c Patent Application and Issuance 809

33-3 Copyrights 812 Case Summary: Lapine v. Seinfeld 813 33-3a Copyright Term 813 33-3b Infringement 813 33-3c First Sale Doctrine 814 33-3d Fair Use 814 33-3e Digital Music and Movies 815 Case Summary: Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd. 816

33-3f International Copyright Treaties 818 33-4 Trademarks 818

33-4a Types of Marks 819 33-4b Ownership and Registration 819 33-4c Valid Trademarks 819 33-4d Infringement 821 You Be the Judge: Network Automation, Inc. v. Advanced Systems Concepts, Inc. 822

33-4e Federal Trademark Dilution Act of 1995 823 33-4f Domain Names 823 33-4g International Trademark Treaties 824

33-5 Trade Secrets 825 Case Summary: Pollack v. Skinsmart Dermatology and Aesthetic Center P.C. 826


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Chapter Conclusion 827 Exam Review 827 Multiple-Choice Questions 828 Essay Questions 829 Discussion Questions 831

Chapter 34 Real and Personal Property 832 34-1 Nature of Real Property 833

Case Summary: Freeman v. Barrs 833 34-2 Estates in Real Property 834

34-2a Concurrent Estates 834 Case Summary: Jackson v. Estate of Green 835

34-3 Nonpossessory Interests 837 34-3a Easements 837 34-3b Profit 837 34-3c License 837 34-3d Mortgage 838

34-4 Land Use Regulation 838 34-4a Nuisance Law 838 34-4b Zoning 839 34-4c Eminent Domain 839

34-5 Landlord-Tenant Law 840 34-5a Three Legal Areas Combined 840 34-5b Lease 840

34-6 Types of Tenancy 840 34-6a Tenancy for Years 841 34-6b Periodic Tenancy 841 34-6c Tenancy at Will 841 34-6d Tenancy at Sufferance 841

34-7 Landlord’s Duties 841 34-7a Duty to Deliver Possession 841 34-7b Quiet Enjoyment 842 34-7c Duty to Maintain Premises 842 Case Summary: Mishkin v. Young 844

34-8 Tenant’s Duties 845 34-8a Duty to Pay Rent 845

34-8b Duty to Use Premises for Proper Purpose 846

34-8c Duty Not to Damage Premises 846 34-8d Duty Not to Disturb Other Tenants 846

34-9 Injuries 847 34-9a Tenant’s Liability 847 34-9b Landlord’s Liability 847

34-10 Personal Property 848 34-11 Gifts 848

34-11a Intention to Transfer Ownership 848 34-11b Delivery 849 34-11c Inter Vivos Gifts and Gifts Causa Mortis 849

34-11d Acceptance 850 You Be the Judge: Albinger v. Harris 850

34-12 Bailment 852 34-12a Control 852 34-12b Rights of the Bailee 852 34-12c Duties of the Bailee 853 You Be the Judge: Johnson v. Weedman 854 34-12d Rights and Duties of the Bailor 854

Chapter Conclusion 854 Exam Review 855 Multiple-Choice Questions 857 Essay Questions 858 Discussion Questions 860

Appendix A The Constitution of the United States A1

Appendix B Uniform Commercial Code (Selected Provisions) B1

Glossary G1

Table of Cases T1

Index I1


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Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.


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A NEW CHAPTER: PRACTICAL CONTRACTS In this textbook, as well as other business law texts, contracts chapters focus on the theory of contract law. And that theory is important. But our students tell us that theory, by itself, is not enough. They need to know how these abstract rules operate in practice. They want to understand the structure and content of a standard agreement. They have questions such as:

• Do I need a written agreement?

• What do these legal terms really mean?

• Are any important provisions missing?

• What happens if a term is unclear?

• Do I need to hire a lawyer? How can I use a lawyer most effectively?

We answer all these questions in Chapter 18, “Practical Contracts,” which is new to this edition. As an illustration throughout the chapter, we use a real-life contract between a movie studio and an actor.

A NEW CHAPTER: EMPLOYMENT DISCRIMINATION We have heard from faculty and students alike that employment law plays an increasingly important role in the life of a businessperson. At the same time, fewer and fewer workers belong to labor unions. Therefore, we have rewritten the labor law and employment law chapters from the previous edition. Instead of one chapter on labor law and one on employ- ment law, we now have a new Chapter 26, “Employment and Labor Law,” which covers both common law employment issues and labor law. In addition, Chapter 27, “Employment Discrimination,” focuses solely on employment discrimination and includes, among other things, an expanded discussion of disparate impact cases, which have become increasingly common and important.

NEW MATERIAL: ETHICS CHAPTER The Ethics chapter has been completely revised and is full of up-to-date examples, all either from the news or true stories provided by executives. The section on the Theories of Ethics has been enhanced and now includes, among others, John Rawls’ theory of justice. This chapter also includes a discussion of the latest research on the ethics traps that prevent us from doing what we know to be right. Students are asked to develop their own list of Life


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Principles that they can use to make ethical decisions and avoid ethics traps. The chapter also discusses the options that employees face when confronted with unethical behavior in the workplace. And, finally, the chapter concludes with a discussion of Corporate Social Responsibility—should companies practice it and, if so, how should they evaluate success?

LANDMARK CASES As a general rule, we want our cases to be as current as possible, reporting on the world as it is now. However, sometimes students can benefit from reading vintage cases that are still good law and provide a deep understanding of how and why the law has developed as it has. Thus, for example, we have added a discussion about the famous Supreme Court case Miranda v. Arizona. Reading this case provides students with a much better understanding of why the Supreme Court created Miranda rights, and this context helps students follow the recent Supreme Court rulings on Miranda. Other landmark cases include Hawkins v. McGee (the case of the hairy hand), and Griggs v. Duke Power Co.

REORGANIZED AND REVISED MATERIAL In response to requests from faculty, product liability is now covered in Chapter 6, “Torts and Product Liability.” It seems that most people like to teach these two subjects together. The discussion of warranties is now found in the chapter on ownership and risk.

The new CPA exam no longer includes questions about banks and their customers, and much of that material (such as how long it takes checks to clear) is not very relevant to our students. Therefore we have deleted the chapter on Banks and Their Customers, and combined the remaining material on Negotiable Instruments into one chapter, which now covers how to create a negotiable instrument and liability.

The chapter on Securities Regulation has been expanded to include coverage of antitrust law, under the title, “Government Regulation.” As the Justice Department increases its oversight of mergers and with price-fixing violations increasingly common, it is more important than ever for students to understand the basics of antitrust law.

In response to faculty requests, we have added a chapter on Consumer Protection. This material is critical for all of us—everyone from the experienced executive to the young adult with increasing financial responsibilities.

END OF CHAPTER MATERIAL To facilitate class discussion and student learning, we have overhauled the study questions at the end of the chapters. They are now divided into three parts:

1. Multiple-choice questions. Because many instructors use this format in their tests, it seemed appropriate to provide practice questions. The answers to these multiple- choice questions are available to students online at

2. Essay questions. Students can use these as study questions, and professors can also assign them as written homework problems.

3. Discussion questions. Instructors can use these questions to enhance class discussion. If assigned in advance, students will have a chance to think about the answers before class. This approach is similar to business cases, which often provide discussion questions in advance.

OTHER NEW MATERIAL We have, of course, added substantial new material, with a particular focus on the Internet and social media. Chapter 26, “Employment and Labor Law,” includes a section on social media. Chapter 29, “Corporations,” uses Facebook as an example of how to organize a corporation. There are also new cases involving eBay and craigslist. In addition,


Copyr igh t 2013 Cengage Lea rn ing . A l l R igh t s Rese rved . May no t be cop i ed , s canned , o r dup l i ca t ed , i n who le o r i n pa r t . Due t o e l ec t ron i c r i gh t s , some th i rd pa r ty con t en t may be supp re s sed f rom the eBook and /o r eChap te r ( s ) . Ed i to r i a l r ev i ew has deemed tha t any supp re s sed con t en t does no t ma te r i a l l y a ff ec t t he ove ra l l l e a rn ing expe r i ence . Cengage Lea rn ing r e se rves t he r i gh t t o r emove add i t i ona l con t en t a t any t ime i f subsequen t r i gh t s r e s t r i c t i ons r equ i r e i t .

Chapter 28, “Starting a Business: LLCs and Other Options,” includes a new section about socially conscious organizations.

STAYING CURRENT: OUR BLOG, FACEBOOK, AND TWITTER To find out about new developments in business law, visit our blog at or our Facebook page at Beatty Business Law. If you follow us on Twitter @bizlawupdate, you will receive a notification automatically whenever we post to the blog.

The Beatty/Samuelson Difference When we began work on the first edition of this textbook, our publisher warned us that our undertaking was risky because there were already so many law texts. Despite these warnings, we were convinced that there was a market for an Essentials book that was different from all the others. Our goal was to capture the passion and excitement—the sheer enjoyment—of the law. Business law is notoriously complex, and as authors we are obsessed with accuracy. Yet this intriguing subject also abounds with human conflict and hard-earned wisdom, forces that can make a law book sparkle.

Now, as this fifth edition goes to press, we look back over the intervening years and are touched by the many unsolicited comments from students, such as these posted on Amazon:

• “Glad I purchased this. It really helps put the law into perspective and allows me as a leader to make intelligent decisions. Thanks.”

• “I enjoyed learning business law and was happy my college wanted this book. THUMBS UP!”

We think of the students who have emailed us to say, “In terms of clarity, comprehen- siveness, and vividness of style, I think it’s probably the best textbook I’ve ever used in any subject,” and “I had no idea business law could be so interesting.” Or the professor who said, “With your book, we have great class discussions.” Comments such as these never cease to thrill us and to make us grateful that we persisted in writing an Essentials text like no other—a book that is precise and authoritative, yet a pleasure to read.

Comprehensive Staying comprehensive means staying current. This fifth edition contains over 25 new cases. Almost all were reported within the last two or three years. We never include a new court opinion merely because it is recent, but the law evolves continually, and our willingness to toss out old cases and add important new ones ensures that this book—and its readers—remain on the frontier of legal developments.

Look, for example, at the important field of corporate governance. All texts cover par value, and so do we. Yet a future executive is far likelier to face conflicts over Sarbanes-Oxley (SOX), executive compensation, and shareholder proposals. We present a clear path through this thicket of new issues. In Chapter 29, for example, read the section about the election and removal of directors. Typically, students (even those who are high-level executives) have a basic misconception about the process of removing a director from office. They think that it is easy. Once they understand the complexity of this process, their whole view of corporate governance—and compensation—changes. We want tomorrow’s business leaders to anticipate the challenges that await them and then use their knowledge to avert problems.

Strong Narrative The law is full of great stories, and we use them. Your students and ours should come to class excited. Look at Chapter 3, “Dispute Resolution.” No tedious list of next steps in litigation, this chapter teaches the subject by tracking a double-indemnity lawsuit. An executive is dead. Did he drown accidentally, obligating the insurance company to pay? Or did the businessman commit suicide, voiding the policy? The student follows the action from the discovery of the body, through each step of the lawsuit, to the final appeal.


Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Students read stories and remember them. Strong narratives provide a rich context for the remarkable quantity of legal material presented. When students care about the material they are reading, they persevere. We have been delighted to find that they also arrive in class eager to question, discuss, and learn more about issues.

Precise The great joy of using English accurately is the power it gives us to attack and dissect difficult issues, rendering them comprehensible to any lay reader. This text takes on the most complex legal topics of the day, yet it is appropriate for all college and graduate-level students. Accessible prose goes hand in hand with legal precision. We take great pride in walking our readers through the most serpentine mazes this tough subject can offer.

As we explore this extraordinary discipline, we lure readers along with quirky anecdotes and colorful diagrams. (Notice that the chart on page 713 clarifies the complex rules of the duty of care in the business judgment rule.) However, before the trip is over, we insist that students:

• Gauge policy and political considerations,

• Grapple with legal and social history,

• Spot the nexus between disparate doctrines, and

• Confront tough moral choices.

Authoritative We insist, as you do, on a law book that is indisputably accurate. A professor must teach with assurance, confident that every paragraph is the result of exhaustive research and meticulous presentation. Dozens of tough-minded people spent thousands of hours reviewing this book, and we are delighted with the stamp of approval we have received from trial and appellate judges, working attorneys, scholars, and teachers.

We reject the cloudy definitions and fuzzy explanations that can invade judicial opinions and legal scholarship. To highlight the most important rules, we use bold print, and then follow with vivacious examples written in clear, forceful English. (See, for example, the discussion of factual cause on page 149.) We cheerfully venture into con- tentious areas, relying on very recent appellate decisions. Can a creditor pierce the veil of an LLC? What are the rights of an LLC member in the absence of an operating agreement? (See pages 679–684.) Where there is doubt about the current (or future) status of a doctrine, we say so. In areas of particularly heated debate, we footnote our work: we want you to have absolute trust in this book.

A Book for Students We have written this book as if we were speaking directly to our students. We provide black letter law, but we also explain concepts in terms that hook students. Over the years, we have learned how much more successfully we can teach when our students are intrigued. No matter what kind of a show we put on in class, they are only learning when they want to learn.

Every chapter begins with a story, either fictional or real, to illustrate the issues in the chapter and provide context. Chapter 32, “Cyberlaw,” begins with the true story of a college student who discovers nude pictures of himself online. These photos had been taken in the locker room without his knowledge. What privacy rights do any of us have? Does the Internet jeopardize them? Students want to know—right away.

Many of our students were not yet born when Bill Clinton was elected president. They come to college with varying levels of preparation; many now arrive from other countries. We have found that to teach business law most effectively, we must provide its context. Chapter 26, on employment law, provides the historical setting for the employment-at-will doctrine. Chapter 33, on intellectual property, explains the difference between intellectual and other types of property.

At the same time, we enjoy offering “nuts-and-bolts” information that grabs students. For example, in Chapter 31, “Consumer Protection,” we offer advice about how students can obtain a free credit report (page 768).


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Students respond enthusiastically to this approach. One professor asked a student to compare our book with the one that the class was then using. This was the student’s reaction: “I really enjoy reading the [Beatty & Samuelson] textbook and I have decided that I will give you this memo ASAP, but I am keeping the book until Wednesday so that I may continue reading. Thanks! :-).”

Along with other professors, we have used this text in courses for undergraduates, MBAs, and Executive MBAs, with the students ranging in age from 18 to 55. The book works, as some unsolicited comments indicate:

• An undergraduate wrote, “This is the best textbook I have had in college, on any subject.”

• A business law professor stated that the “clarity of presentation is superlative. I have never seen the complexity of contract law made this readable.”

• An MBA student commented, “I think the textbook is great. The book is relevant, easy to understand, and interesting.”

• A state supreme court justice wrote that the book is “a valuable blend of rich scholarship and easy readability. Students and professors should rejoice with this publication.”

• A Fortune 500 vice president, enrolled in an Executive MBA program, commented, “I really liked the chapters. They were crisp, organized and current. The information was easy to understand and enjoyable.”

• An undergraduate wrote, “The textbook is awesome. A lot of the time I read more than what is assigned—I just don’t want to stop.”

Humor Throughout the text, we use humor—judiciously—to lighten and enlighten. Not surprisingly, students have applauded—but is it appropriate? How dare we employ levity in this venerable discipline? We offer humor because we take the law seriously. We revere the law for its ancient traditions; its dazzling intricacy; its relentless, though imperfect, attempt to give order and decency to our world. Because we are confident of our respect for the law, we are not afraid to employ some levity. Leaden prose masquerading as legal scholarship does no honor to the field.

Humor also helps retention. Research shows that the funnier or more bizarre the example, the longer students will remember it. Students are more likely to remember a contract problem described in a fanciful setting, and from that setting recall the underlying principle. By contrast, one widget is hard to distinguish from another.

Features We chose the features for our book with great care. Each one supports an essential pedagogical goal. Here are some of those goals and the matching feature.

EXAM STRATEGY GOAL: To help students learn more effectively and to prepare for exams. In preparing this fifth edition, we asked ourselves: What do students want? The short answer is—a good grade in the course. How many times a semester does a student ask you, “What can I do to study for the exam?” We are happy to help them study and earn a good grade because that means they are learning.

About six times per chapter, we stop the action and give students a two-minute quiz. In the body of the text, again in the end-of-chapter review, and also in the Instructor’s Manual, we present a typical exam question. Here lies the innovation: We guide the


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student in analyzing the issue. We teach the reader—over and over—how to approach a question: To start with the overarching principle, examine the fine point raised in the question, apply the analysis that courts use, and deduce the right answer. This skill is second nature to lawyers, but not to students. Without practice, too many students panic, jumping at a convenient answer and leaving aside the tools that they have spent the course acquiring. Let’s change that. Students tell us that they love the Exam Strategy feature.

YOU BE THE JUDGE GOAL: Get students to think independently. When reading case opinions, students tend to accept the court’s “answer.” Judges, of course, try to reach decisions that appear indisputable, when in reality they may be controversial—or wrong. From time to time we want students to think through the problem and reach their own answer. Almost every chapter contains a You Be the Judge feature, providing the facts of the case and conflicting appellate arguments. The court’s decision, however, appears only in the Instructor’s Manual. Because students do not know the result, class discussions are more complex and lively.

ETHICS GOAL: Make ethics real.We ask ethical questions about cases, legal issues, and commercial practices. Is it fair for one party to void a contract by arguing, months after the fact, that there was no consideration? What is a manager’s ethical obligation when asked to provide a reference for a former employee? What is wrong with bribery? We believe that asking the questions and encouraging discussion reminds students that ethics is an essential element of justice and of a satisfying life.

CASES GOAL: Bring Case Law Alive. Each case begins with a summary of the facts followed by a statement of both the issue and the decision. Next comes a summary of the court’s opinion. We have written this summary ourselves to make the judges’ reasoning accessible to all readers while retaining the court’s focus and the decision’s impact. We cite cases using a modified bluebook form. In the principal cases in each chapter, we provide the state or federal citation, the regional citation, and the LEXIS or Westlaw citation. We also give students a brief description of the court. Because many of our cases are so recent, some will have only a regional reporter and a LEXIS or Westlaw citation.

EXAM REVIEW GOAL: Help students to remember and practice! At the end of every chapter, we provide a list of review points and several additional Exam Strategy exercises in a Question/Strategy/ Result format. We also challenge the students with 15 or more problems—Multiple-Choice, Essay Questions, and Discussion Questions. The questions include the following:

• You Be the Judge Writing Problem. The students are given appellate arguments on both sides of the question and must prepare a written opinion.

• Ethics. This question highlights the ethical issues of a dispute and calls upon the student to formulate a specific, reasoned response.

• CPA Questions. Where relevant, practice tests include questions from previous CPA exams administered by the American Institute of Certified Public Accountants.

Answers to all the Multiple-Choice questions are available to students online through


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TEACHING MATERIALS For more information about any of these ancillaries, contact your Cengage Learning/ SouthWestern Legal Studies Sales Representative for more details, or visit the Beatty & Samuelson Essentials, fifth edition web page, accessed through

Instructor’s Manual Available through, this manual includes answers to the You Be the Judge cases and also to the questions at the end of each chapter. In addition, the Instructors’ Manual provides additional cases to use as the basis of class discussion as well as other pedagogical features.

PowerPoint Lecture Review Slides PowerPoint slides are available for instructors to use with their lectures, and can be accessed through

Test Bank The test bank offers hundreds of essay, short-answer, and multiple-choice problems. Editable files of the test bank are available at, and the test bank is also available through the Cognero Testing Software.

Cognero Testing Software—Computerized Testing Software This online testing system contains all of the questions in the test bank. Instructors can add or edit questions, instructions, and answers; and select questions by previewing them on the screen, selecting them randomly, or selecting them by number. Instructors can also create and administer quizzes online.

CengageNOW This robust, online course management system gives you more control in less time and delivers better student outcomes—NOW. CengageNOW for Essentials 5e includes six homework types that align with the six levels of Bloom’s taxonomy: Knowledge: Chapter Review; Comprehension: Business Law Scenarios; Application: Legal Reasoning; Analysis: IRAC; Synthesis: Exam Strategy; and Evaluation: Business Wisdom. With all these elements used together, CengageNOW will ensure that students develop the higher-level thinking skills they need to reach an advanced understanding of the material.

Business Law CourseMate Cengage Learning’s Business Law CourseMate brings course concepts to life with interactive learning, study, and exam preparation tools— including an e-book—that supports the printed textbook. Designed to address a variety of learning styles, students will have access to flashcards, Learning Objectives, and the Key Terms for quick reviews. A set of auto-gradable, interactive quizzes will allow students to instantly gauge their comprehension of the material. For instructors, all quiz scores and student activity are mapped within Engagement Tracker, a set of intuitive student performance analytical tools that help identify at-risk students. An interactive blog helps connect book concepts to real-world situations happening now.

Business Law Digital Video Library This dynamic online video library features over 90 video clips that spark class discussion and clarify core legal principles. The library is organized into six series:

• Legal Conflicts in Business includes specific modern business and e-commerce scenarios.

• Ask the Instructor contains straightforward explanations of concepts for student review.

• Drama of the Law features classic business scenarios that spark classroom participation.


Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

• Real World Legal takes students out of the classroom and into real-life situations, encouraging them to consider the legal aspects of decision making in the business world.

• Business Ethics in Action challenges students to examine ethical dilemmas in the world of business.

Access to the Business Law Digital Video Library is available as an optional package with each new student text at no additional charge. Students with used books can purchase access to the video clips online. For more information about the Business Law Digital Video Library, visit

A Handbook of Basic Law Terms, Blacks Law Dictionary Series This paperback dictionary, prepared by the editor of the popular Black’s Law Dictionary, can be packaged for a small additional cost with any new South-Western Legal Studies in Business text.

Student Guide to the SOX This brief overview for business students explains SOX, what is required of whom, and how it might affect students in their business lives. Available as an optional package with the text.

Interaction with the Author This is my standard: Every professor who adopts this book must have a superior experience. I am available to help in any way I can. Adopters of this text often call me or email me to ask questions, obtain a syllabus, offer suggestions, share pedagogical concerns, or inquire about ancillaries. One of the pleasures of working on this project has been this link to so many colleagues around the country. I value those connections, am eager to respond, and would be happy to hear from you.

Susan S. Samuelson Phone: (617) 353-2033


ACKNOWLEDGMENTS We appreciate the thoughtful insights of the reviewers for this fifth edition: Randall Berens Ohio University-Lancaster

Machiavelli Chao University of California, Irvine

Raven Davenport Houston Community College System

Terry L. Dimmick Lakeshore Technical College

Craig Dokken Hamline University

Philip Ettman Westfield State University

Sheryl Fitzpatrick North Iowa Area Community College

Janet L. Grange Chicago State University

John Gray Faulkner University

Jack Green MiraCosta College

Anne-Marie Hakstian Salem State University

Nancy Johnson Mt. San Jacinto Community College

Sandra Leigh King Sullivan University


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Ken Knox Eastern Gateway Community College

Joni Koegel Cazenovia College

Greg Lauer North Iowa Area Community College

Donald Letourneau Pacific University

Magdalena Lorenz State University of New York College of Oneonta

Bill Mills East Texas Baptist University

Jack Neveaux Saint Mary’s University of Minnesota

Brad Reid Lipscomb University

Alan Rosenbloom Baruch College

Tom Severance MiraCosta College

Frank Wetterau Delaware Technical Community College

Kim Wong Central New Mexico Community College

Bruce Zucker California State University, Northridge

And we are continually grateful to the following reviewers who gave such helpful comments on the first four editions of this book:

Manzoor Ahmad Compton Educational Center, El Camino College

Steven J. Arsenault College of Charleston

Lois Beier Kent State University

Martha Broderick University of Maine

Amy Chataginer Mississippi Gulf Coast Community College

Burke Christensen Eastern Kentucky University

Linda Christiansen Indiana University Southeast

Michael Costello University of Missouri, St. Louis

G. Howard Doty Nashville State Technical Community College

Teri Elkins University of Houston

Lizbeth G. Ellis New Mexico State University

Paul Fiorelli Xavier University

Suzanne M. Gradisher University of Akron

Gary Greene Manatee Community College

Wendy Hind Doane College

Elizabeth Grimm-Howell University of Missouri—St. Louis

Richard Guarino California State University, Sacramento

Stephen Hearn Louisiana Tech University

Timothy Jackson School of Business, California Baptist University

William C. Kostner Doane College

Ronald B. Kowalczyk Elgin Community College

Colleen Arnott Less Johnson & Wales University

Maurice J. McCann Southern Illinois University Carbondale


Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Russ Meade Gardner-Webb University

Michael Monhollon Hardin-Simmons University

Carol Nielsen Bemidji State University

Margaret A. Parker Owens Community College

Barbara Redman Gainesville State College

Bruce L. Rockwood Bloomsburg University

Rebecca Rutz Mississippi Gulf Coast Community College—Jackson County Campus

Rachel Spooner Boston University School of Management

Cheryl Staley Lake Land College

Paulette L. Stenzel Michigan State University

Kenneth Ray Taurman, Jr. Indiana University Southeast

Daphyne Saunders Thomas James Madison University

Glen M. Vogel Hofstra University

Deborah Walsh Middlesex Community College

ABOUT THE AUTHORS Jeffrey F. Beatty was an associate professor of business law at the Boston University School of Management. After receiving his B.A. from Sarah Lawrence and his J.D. from Boston University, he practiced with the Greater Boston Legal Services representing indigent clients. At Boston University, he won the Metcalf Cup and Prize, the university’s highest teaching award. Professor Beatty also wrote plays and television scripts that were performed in Boston, London, and Amsterdam.

Susan S. Samuelson is a professor of business law at Boston University’s School of Management. After earning her undergraduate and law degrees at Harvard University, Professor Samuelson practiced with the firm of Choate, Hall, and Stewart. She has written many articles on legal issues for scholarly and popular journals, including the American Business Law Journal, Ohio State Law Journal, Boston University Law Review, Harvard Journal on Legislation, National Law Journal, Sloan Management Review, Better Homes and Gardens, and Boston Magazine. At Boston University, she won the Broderick Prize for excellence in teaching. For 12 years, Professor Samuelson was the faculty director of the Boston Uni- versity Executive MBA program.

xxviii PREFACE

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The Legal Environment

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CHAPTER1 INTRODUCTION TO LAW The Pagans were a motorcycle gang with a repu- tation for violence. Two of its rougher members, Rhino and Backdraft, entered a tavern called the Pub Zone, shoving their way past the bouncer. The pair wore gang insignia, in violation of the bar’s rules. For a while, all was quiet, as the two sipped drinks at the bar. Then they followed an innocent patron toward the men’s room, and things happened fast.

“Wait a moment,” you may be thinking. “Are we reading a chapter on business law or one about biker crimes in a roadside tavern?” Both.

Law is powerful, essential, and fascinating. We hope this book will persuade you of all three ideas. Law can also be surprising. Later in the chapter we will return to the Pub Zone (with armed guards) and follow Rhino and Backdraft to the back of the pub. Yes, the pair engaged in street crime, which is hardly a focus of this text. However, their criminal acts will enable us to explore one of the law’s basic principles, negligence. Should a pub owner pay money damages to the victim of gang violence? The owner herself did nothing aggressive. Should she have prevented the harm? Does her failure to stop the assault make her liable?

We place great demands on our courts, asking them to make our large, complex, and sometimes violent society into a safer, fairer, more orderly place. The Pub Zone case is a good example of how judges reason their way through the convoluted issues involved. What began as a gang incident ends up as a matter of commercial liability. We will traipse after Rhino and Backdraft because they have a lesson to teach anyone who enters the world of business.

For a while, all was quiet, as the two sipped drinks at the bar. Then they followed an innocent

patron toward the men’s room…

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1-1 THE ROLE OF LAW IN SOCIETY 1-1a Power The strong reach of the law touches nearly everything we do, especially at work. Consider a mid-level manager at Sublime Corp., which manufactures and distributes video games.

During the course of a day’s work, she might negotiate a deal with a game developer (contract law). Before signing any deals, she might research whether similar games already exist, which might diminish her ability to market the proposed new game (intellectual property law). One of her subordinates might complain about being harassed by a coworker (employment law). Another worker may complain about being required to work long hours (administrative law). And she may consider investing her own money in her company’s stock, but she may wonder whether she will get into trouble if she invests based on inside information (securities law).

It is not only as a corporate manager that you will confront the law. As a voter, investor, juror, entrepreneur, and community member, you will influence and be affected by the law. Whenever you take a stance about a legal issue, whether in the corporate office, in the voting booth, or as part of local community groups, you help to create the fabric of our nation. Your views are vital. This book will offer you knowledge and ideas from which to form and continually reassess your legal opinions and values.

1-1b Importance Law is also essential. Every society of which we have any historical record has had some system of laws. For example, consider the Visigoths, a nomadic European people who overran much of present-day France and Spain during the fifth and sixth centuries C.E. Their code admirably required judges to be “quick of perception, clear in judgment, and lenient in the infliction of penalties.” It detailed dozens of crimes.

Our legal system is largely based upon the English model, but many societies contributed ideas. The Iroquois Native Americans, for example, played a role in the creation of our own government. Five major nations made up the Iroquois group: the Mohawk, Cayuga, Oneida, Onondaga, and Seneca. Each nation governed its own domestic issues. But each nation also elected “sachems” to a League of the Iroquois. The league had authority over any matters that were common to all, such as relations with outsiders. Thus, by the fifteenth century, the Iroquois had solved the problem of federalism: how to have two levels of government, each with specified powers. Their system impressed Benjamin Franklin and others and influenced the drafting of our Constitution, with its powers divided between state and federal governments.1

1-1c Fascination In 1835, the young French aristocrat Alexis de Tocqueville traveled through the United States, observing the newly democratic people and the qualities that made them unique. One of the things that struck de Tocqueville most forcefully was the American tendency to file suit: “Scarcely any political question arises in the United States that is not resolved, sooner or later, into a judicial question.”2 De Tocqueville got it right: For better or worse, we do expect courts to solve many problems.

Not only do Americans litigate—they watch each other do it. Every television season offers at least one new courtroom drama to a national audience breathless for more cross-examination. Almost all of the states permit live television coverage of real trials. One of the most heavily viewed events in the history of courtroom television was the 1995

1Jack Weatherford, Indian Givers (New York: Fawcett Columbine, 1988), pp. 133–150. 2Alexis de Tocqueville, Democracy in America (1835), Vol. 1, Ch. 16.

CHAPTER 1 Introduction to Law 3

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murder trial of former football star O.J. Simpson: 150 million viewers tuned in. In most nations, coverage of judicial proceedings is not allowed.3

The law is a big part of our lives, and it is wise to know something about it. Within a few weeks, you will probably find yourself following legal events in the news with keener interest and deeper understanding. In this chapter, we develop the background for our study. We look at where law comes from: its history and its present-day institutions. In the section on jurisprudence, we examine different theories about what “law” really means. And finally we see how courts—and students—analyze a case.

1-2 ORIGINS OF OUR LAW It would be nice if we could look up “the law” in one book, memorize it, and then apply it. But the law is not that simple, and cannot be that simple, because it reflects the complexity of contemporary life. In truth, there is no such thing as “the law.” Principles and rules of law actually come from many different sources. Why is this so? In part because we inherited a complex structure of laws from England.

Additionally, ours is a nation born in revolution and created, in large part, to protect the rights of its people from the government. The Founding Fathers created a national government but insisted that the individual states maintain control in many areas. As a result, each state has its own government with exclusive power over many important areas of our lives. To top it off, the Founders guaranteed many rights to the people alone, ordering national and state govern- ments to keep clear. This has worked, but it has caused a multilayered system, with 50 state governments and one federal government all creating and enforcing law.

1-2a English Roots England in the tenth century was a rustic agricultural community with a tiny population and very little law or order. Vikings invaded repeatedly, terrorizing the Anglo-Saxon peoples. Criminals were hard to catch in the heavily forested, sparsely settled nation. The king used a primitive legal system to maintain a tenuous control over his people.

England was divided into shires, and daily administration was carried out by a “shire reeve,” later called a sheriff. The shire reeve collected taxes and did what he could to keep peace, apprehending criminals and acting as mediator between feuding families. Two or three times a year, a shire court met; lower courts met more frequently. Today, this method of resolving disputes lives on as mediation, which we will discuss in Chapter 3.

Because there were so few officers to keep the peace, Anglo-Saxon society created an interesting method of ensuring public order. Every freeman belonged to a group of 10 freemen known as a “tithing,” headed by a “tithingman.” If anyone injured a person outside his tithing or interfered with the king’s property, all 10 men of the tithing could be forced to pay. Today, we still use this idea of collective responsibility in business partnerships. All partners are personally responsible for the debts of the partnership. They could potentially lose their homes and all assets because of the irresponsible conduct of one partner. That liability has helped create new forms of business organization, including limited liability companies.

When cases did come before an Anglo-Saxon court, the parties would often be represented by a clergyman, by a nobleman, or by themselves. There were few professional lawyers. Each party produced “oath helpers,” usually 12, who would swear that one version of events was correct. The Anglo-Saxon oath helpers were forerunners of our modern jury of 12 persons.

3Regardless of whether we allow cameras, it is an undeniable benefit of the electronic age that we can obtain information quickly. From time to time, we will mention websites of interest. Some of these are for nonprofit groups, while others are commercial sites. We do not endorse or advocate on behalf of any group or company; we simply wish to alert you to what is available.

4 U N I T 1 The Legal Environment

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In 1066, the Normans conquered England. William the Conqueror made a claim never before made in England: that he owned all of the land. The king then granted sections of his lands to his favorite noblemen, as his tenants in chief, creating the system of feudalism. These tenants in chief then granted parts of their land to tenants in demesne, who actually occupied a particular estate. Each tenant in demesne owed fidelity to his lord (hence, “landlord”). So what? Just this: land became the most valuable commodity in all of England, and our law still reflects that. One thousand years later, American law still regards land as special. The Statute of Frauds, which we study in the section on contracts, demands that contracts for the sale or lease of property be in writing. And landlord-tenant law, vital to students andmany others, still reflects its ancient roots. Some of a landlord’s rights are based on the 1,000-year-old tradition that land is uniquely valuable.

In 1250, Henry de Bracton (d. 1268) wrote a legal treatise that still influences us. De Legibus et Consuetudinibus Angliae (On the Laws and Customs of England), written in Latin, summarized many of the legal rulings in cases since the Norman Conquest. De Bracton was teaching judges to rule based on previous cases. He was helping to establish the idea of precedent. The doctrine of precedent, which developed gradually over centuries, requires that judges decide current cases based on previous rulings. This vital principle is the heart of American common law. Precedent ensures predictability. Suppose a 17-year-old student promises to lease an apartment from a landlord, but then changes her mind. The landlord sues to enforce the lease. The student claims that she cannot be held to the agreement because she is a minor. The judge will look for precedent, that is, older cases dealing with the same issue, and hewill findmany holding that a contract generallymay not be enforced against a minor. That precedent is binding on this case, and the student wins. The accumulation of precedent, based on case after case, makes up the common law.

In the end, today’s society is dramatically different from that of medieval English society. But interestingly, legal disputes from hundreds of years ago are often quite recog- nizable today. Some things have changed but others never do.

Here is an actual case from more than six centuries ago, in the court’s own language. The plaintiff claims that he asked the defendant to heal his eye with “herbs and other medicines.” He says the defendant did it so badly that he blinded the plaintiff in that eye.

THE OCULIST’S CASE (1329) LI MS. Hale 137 (1), fo. 150, Nottingham4


Attorney Launde [for defendant]: Sir, you plainly see how [the plaintiff claims] that he had submitted himself to [the defendant’s] medicines and his care; and after that he can assign no trespass in his person, inasmuch as he sub- mitted himself to his care: but this action, if he has any, sounds naturally in breach of covenant. We demand [that the case be dismissed].

Excerpts from Judge Denum’s Decision: I saw aNew- castle man arraigned before my fellow justice and me for the death of a man. I asked the reason for the indictment, and it

was said that he had slain a man under his care, who died within four days afterwards. And because I saw that he was a [doctor] and that he had not done the thing feloniously but [accidentally] I ordered him to be discharged. And suppose a blacksmith, who is a man of skill, injures your horse with a nail, whereby you lose your horse: you shall never have recovery against him. No more shall you here.

Afterwards the plaintiff did not wish to pursue his case any more.

Common law Judge-made law.

4J. Baker and S. Milsom, Sources of English Legal History (London: Butterworth & Co., 1986).

Precedent The tendency to decide current cases based on previous rulings.

CHAPTER 1 Introduction to Law 5

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This case from 1329 is an ancient medical malpractice action. Attorney Launde does not deny that his client blinded the plaintiff. He claims that the plaintiff has brought the wrong kind of lawsuit. Launde argues that the plaintiff should have brought a case of “covenant”; that is, a lawsuit about a contract.

Judge Denum decides the case on a different principle. He gives judgment to the defendant because the plaintiff voluntarily sought medical care. He implies that the defendant would lose only if he had attacked the plaintiff. As we will see when we study negligence law, this case might have a different outcome today. Note also the informality of the judge’s ruling. He rather casually mentions that he came across a related case once before and that he would stand by that outcome. The idea of precedent is just beginning to take hold.

1-2b Law in the United States The colonists brought with them a basic knowledge of English law, some of which they were content to adopt as their own. Other parts, such as religious restrictions, were abhorrent to them. Many settlers had made the dangerous trip to America precisely to escape persecution, and they were not interested in recreating their difficulties in a new land. Finally, some laws were simply irrelevant or unworkable in a world that was socially and geographically so different. American law ever since has been a blend of the ancient principles of English common law and a zeal and determination for change.

During the nineteenth century, the United States changed from a weak, rural nation into one of vast size and potential power. Cities grew, factories appeared, and sweeping movements of social migration changed the population. Changing conditions raised new legal questions. Did workers have a right to form industrial unions? To what extent should a manufacturer be liable if its product injured someone? Could a state government invalidate an employment contract that required 16-hour workdays? Should one company be permitted to dominate an entire industry?

In the twentieth century, the rate of social and technological change increased, creating new legal puzzles. Were some products, such as automobiles, so inherently dangerous that the seller should be responsible for injuries even if no mistakes were made in manufacturing? Who should clean up toxic waste if the company that had caused the pollution no longer existed? If a consumer signed a contract with a billion-dollar corporation, should the agreement be enforced even if the consumer never understood it? New and startling questions arise with great regularity. Before we can begin to examine the answers, we need to understand the sources of con- temporary law.

1-3 SOURCES OF CONTEMPORARY LAW Throughout the text, we will examine countless legal ideas. But binding rules come from many different places. This section describes the significant categories of laws in the United States.

6 U N I T 1 The Legal Environment

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1-3a United States Constitution America’s greatest legal achievement was the writing of the United States Constitution in 1787. It is the supreme law of the land.5 Any law that conflicts with it is void. This federal Constitution does three basic things. First, it establishes the national government of the United States, with its three branches. Second, it creates a system of checks and balances among the branches. And third, the Constitution guarantees many basic rights to the American people.

BRANCHES OF GOVERNMENT The Founding Fathers sought a division of government power. They did not want all power centralized in a king or in anyone else. And so, the Constitution divides legal authority into three pieces: legislative, executive, and judicial power.

Legislative power gives the ability to create new laws. In Article I, the Constitution gives this power to the Congress, which is comprised of two chambers—a Senate and a House of Representatives. Voters in all 50 states elect representatives who go to Washington, D.C., to serve in the Congress and debate new legal ideas.

The House of Representatives has 435 voting members. A state’s voting power is based on its population. Large states (Texas, California, and Florida) send dozens of representa- tives to the House. Some small states (Wyoming, North Dakota, and Delaware) send only one. The Senate has 100 voting members—two from each state.

Executive power is the authority to enforce laws. Article II of the Constitution establishes the President as commander in chief of the armed forces and the head of the executive branch of the federal government.

Judicial power gives the right to interpret laws and determine their validity. Article III places the Supreme Court at the head of the judicial branch of the federal government. Interpretive power is often underrated, but it is often every bit as important as the ability to create laws in the first place. For instance, the Supreme Court ruled that privacy provisions of the Constitution protect a woman’s right to abortion, although neither the word “privacy” nor “abortion” appears in the text of the Constitution.6

At times, courts void laws altogether. For example, in 1995, the Supreme Court ruled that the Gun-Free School Zones Act of 1990 was unconstitutional because Congress did not have the authority to pass such a law.7

CHECKS AND BALANCES Sidney Crosby might score 300 goals per season if checking were not allowed in the National Hockey League. But because opponents are allowed to hit Crosby and the rest of his teammates on the Penguins, he is held to a much more reasonable 50 goals per year.

Political checks work in much the same way. They allow one branch of the government to trip up another.

The authors of the Constitution were not content merely to divide government power three ways. They also wanted to give each part of the government some power over the other two branches. Many people complain about “gridlock” in Washington, but the government is slow and sluggish by design. The Founding Fathers wanted to create a system that, without broad agreement, would tend towards inaction.

The President can veto Congressional legislation. Congress can impeach the President. The Supreme Court can void laws passed by Congress. The President appoints judges to

5The Constitution took effect in 1788, when 9 of 13 colonies ratified it. Two more colonies ratified it that year, and the last of the 13 did so in 1789, after the government was already in operation. The complete text of the Constitution appears in Appendix A. 6Roe v. Wade, 410 U.S. 113 (1973). 7United States v. Alfonso Lopez, Jr., 514 U.S. 549 (1995).

CHAPTER 1 Introduction to Law 7

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Sources of Law

Legislative Branch

Executive Branch

Judicial Branch

State Legislature • passes statutes on state law

• creates state agencies


• proposes statutes • signs or vetoes statutes • oversees state agencies

State Courts • create state common law • interpret statutes • review constitutionality of statutes and other acts

50 State Governments

State Constitution • establishes the state government • guarantees the rights of state residents

One Federal Government

United States Constitution • establishes limited federal government • protects states’ power • guarantees liberty of citizens

Administrative Agencies oversee day-to-day application of law in dozens of commercial and other areas

Legislative Branch

Executive Branch

Judicial Branch


• passes statutes • ratifies treaties • creates administrative agencies


• proposes statutes • signs or vetoes statutes • oversees administrative agencies

Federal Courts • interpret statutes • create (limited) federal common law • review the constitutionality of statutes and other legal acts

Administrative Agencies oversee day-to-day application of law in dozens of commercial and other areas

Federal Form of Government. Principles and rules of law come from many sources. The government in Washington creates and enforces law throughout the nation. But 50 state governments exercise great power in local affairs. And citizens enjoy constitutional protection from both state and federal government. The Founding Fathers wanted this balance of power and rights, but the overlapping authority creates legal complexity.

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“Determination of a Solubility Product Constant”

Purpose of Experiment:

According to the textbook, the purpose of this experiment is to determine the solubility product constant Ksp for Ca(IO3)2.xH2O by investigating the dissolved iodate ion concentration in saturated solutions of calcium iodate.


First we added 50 mL of 0.240 M KI, 10 mL of Ca(IO3)2 in water solution 1 and 10 mL of 1 M HCl to a 250 mL Erlenmeyer flask for each trail. Adding the components will make the solution turn brown. Moreover, we had to set up a buret and titrate Na2S2O3 until the solution turns into a yellow. Then finally add 10 drops of 1% starch indicator which will turn the solution to blue-black and we kept titrating until the solution just turns colorless. Then we recorded all buret readings. To sum, we repeated the procedure about 4 to 6 times until we obtained the accurate values.

Then we will make titrations of saturated calcium iodate in KIO3. Add 50 mL of 0.240 M KI, 10 mL of Ca(IO3)2 in KIO3 (solution 2) and 10 mL of 1 M HCl to a 250 mL erlenmeyer flask. The solution will turn to brown. Then we set up a buret and titrate Na2S2O3 until the solution turns to yellow. Then finally add 10 drops of 1% starch indicator which will change the solution to dark blue and keep titrating until the solution just turns colorless. And we recorded all the buret readings.


After we added all the components to the Erlenmeyer flask, the solution turned to brown and by titrating Na2S2O3, the solution turned to yellow and finally we add the starch indicator and we also will continue titrating until the solution turns colorless.

Data for the saturated Calcium Iodate titration in water (Solution 1):

Final Buret Reading10.5mL25 mL30.5X
Initial Buret Reading0 mL10.5 mL25.5X
Vol. of Na2S2O3 used10.5 mL14.5 mL5.5X
[Na2S2O3]0.05 L0.05 L0.05X
mol S2O32-5.22*10^-4L7.25*10^-4L2.75*10^-4LX
mol IO3-8.75*10^-5L1.208*10^-4L4.583*10^-5LX
vol. of Ca(IO3)20.01L0.01L0.01LX

Data for saturated Calcium Iodate in KIO3 (Solution 2):

Final Buret Reading28L38.548X
Initial Buret Reading028L38.5X
Vol. of Na2S2O3 used28L10.5 L9.5X
Mol S203- reacted (L)0.0014L5.25*10^-4L4.75*10^-4LX
Mol IO3- reacted0.00023(mol)8.75*10^-57.92*10^-5X
Vol. of Ca(IO3-)2 (with KIO3) used0.01L0.01L0.01LX
Mol IO3- from KIO3.0000056(mol/L).0000056(mol/L).0000056(mol/L)X
Mol IO3- from Ca(IO3)22.44*10^-48.19*10^-57.3*10^-5X
[IO3-] from Ca(IO3)20.022448.19*10^-37.36*10^-3X


Overall, our data indicated that Ca(IO3)2.H2O is actually more soluble in water. Since we didn’t get the accurate values from the beginning, we had to redo the experiment to get more accurate results and values. However, the Ksp Data remained constant and similar. Also, we could have used sodium iodate as another salt option. We were able to determine and investigate the [IO3-] and the [Ca2+] and refer to the values to obtain Ksp.


Q3: It will be different because Ksp of Ca(IO3)(IO-3) and if Ca(Io2)2 in H2O then the concentration of Ca2+ and (IO-3) is higher so the value of Ksp is high.

Q4: Another salt solution that could have been used to provide a common ion effect is Cacl2.

Q5: From Le Chatelier’s principle we would predict that the molar solubility of calcium idotae would be smaller so adding CaCl2 Ca(No3)2 the equilibrium shifts towards left. Also, dirty glassware.

Q6: Saturated Solution – Chemical solution containing maximum concentration of solute dissolved in a solvent so, additional solute will not dissolve in the saturated solution.


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Take Test: MC11

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Horatio Oscar Vineeth Lane (HOV Lane for short) records his commute times for a period of one month and assigned them to five different categories as shown in the table. 

What is the probability that Mr. Lane makes it home in under thirty minutes? .15 .35 .20 .55

QUEST ION 1 1 points    Save Answer

For the normal distribution, the mean plus and minus 1.96 standard deviations will include what percent of the observations?


QUEST ION 2 1 points  Saved


Organizons & Clb Help

84% 90%

95% 97%

If we know that the length of time it takes a college student to find a parking spot in the library parking lot follows a normal distribution with a mean of 3.5 minutes and a standard deviation of 1 minute, find the probability that a randomly selected college student will find a parking spot in the library parking lot in less than 3 minutes.

0.3551 0.3085 0.2674 0.1915

QUEST ION 3 1 points    Saved

Under the normal curve, the area between z = 1 and z = ­2 includes approximately ________ of the values.

98% 95% 85% 82%

QUEST ION 4 1 points    Save Answer

For some positive value of Z, the probability that a standard normal variable is between 0 and Z is 0.3554. The value of Z is:

0.31 0.36 0.95 1.06

QUEST ION 5 1 points    Saved

________ is a measure of the dispersion of random variable values about the expected value or mean.

Standard deviation Sample mean Population mean Expected value

QUEST ION 6 1 points    Saved

The area under the normal curve represents probability, and the total area under the curve sums to:

QUEST ION 7 1 points    Save Answer

sums to: 0 0.5

1 2

In a given experiment the probabilities of mutually exclusive events sum to: 0 0.5 1 This cannot be answered without knowing the probability values of the events.

QUEST ION 8 1 points    Saved

Jim is considering pursuing an MS in Information Systems degree. He has applied to two different universities. The acceptance rate for applicants with similar qualifications is 20% for University X and 45% for University Y. What is the probability that Jim will be accepted at both universities?





QUEST ION 9 1 points    Saved

Bayesian analysis involves a(n) ________ probability. a priori posterior joint relative frequency

QUEST ION 10 1 points    Saved

The ________ and variance are derived from a subset of the population data and are used to make inferences about the population.

population variance population standard deviation population mean sample mean

QUEST ION 11 1 points    Saved

A professor would like to assign grades such that 7% of students receive Fs. If the exam average is 62 with a standard deviation of 13, what grade should be the cutoff for an F? (Round your answer.)

QUEST ION 12 1 points    Save Answer

(Round your answer.) 43

49 50 55

In a ________ distribution, for each of n trials, the event always has the same probability of occurring.

binomial joint frequency standard

QUEST ION 13 1 points    Saved

Horatio Oscar Vineeth Lane (HOV Lane for short) records his commute times for a period of one month and assigned them to five different categories as shown in the table. 

Which of these events are mutually exclusive? The duration of Mr. Lane’s commute is less than expected; Mr. Lane’s commute is between twenty and thirty minutes. Mr. Lane’s commute is longer than 30 minutes; Mr. Lane’s commute is longer than 40 minutes. Mr Lanes commute is between ten and forty minutes; Mr. Lane’s commute is between twenty and thirty minutes. Mr. Lane’s commute takes less than ten minutes; Mr Lane’s commute exceeds his expected commute.

QUEST ION 14 1 points    Save Answer

Employees of a local company are classified according to gender and job type. The following table summarizes the number of people in each job category.  

If an employee is selected at random, what is the probability that the employee is female or works as a member of the administration?

QUEST ION 15 1 points    Save Answer

works as a member of the administration? .17 .67 .70 .73

________ techniques assume that no uncertainty exists in model parameters. Probability Probabilistic Deterministic Distribution

QUEST ION 16 1 points    Saved

Horatio Oscar Vineeth Lane (HOV Lane for short) records his commute times for a period of one month and assigned them to five different categories as shown in the table. 

What is the duration of Mr. Lane’s expected commute? 31.5 minutes 27.25 minutes 25.5 minutes 33.75 minutes

QUEST ION 17 1 points    Save Answer

The probability of independent events occurring in succession is computed by ________ the probabilities of each event.

multiplying adding subtracting dividing

QUEST ION 18 1 points    Saved

Jim is considering pursuing an MS in Information Systems degree. He has applied to two different universities. The acceptance rate for applicants with similar qualifications is 20% for University X and 45% for University Y. What is the probability that Jim will not be accepted at either university?


QUEST ION 19 1 points    Saved




Assume that it takes a college student an average of 5 minutes to find a parking spot in the main parking lot. Assume also that this time is normally distributed with a standard deviation of 2 minutes. What time is exceeded by approximately 75% of the college students when trying to find a parking spot in the main parking lot?

3.65 minutes 5.75 minutes 6.36 minutes 9.21 minutes

QUEST ION 20 1 points    Saved

The weight of a jar of jelly is normally distributed with a mean of 16 oz and a standard deviation of 0.02 oz. What is the probability that a jar of jelly contains more than 16.03 oz?





QUEST ION 21 1 points    Saved

A ________ probability is the altered marginal probability of an event based on additional information.

posterior joint marginal conditional

QUEST ION 22 1 points    Saved

For some value of Z, the probability that a standard normal variable is below Z is 0.3783. The value of Z is:

0.81 ­0.31 0.82 1.55

QUEST ION 23 1 points    Save Answer

Assume that it takes a college student an average of 5 minutes to find a parking spot in the main parking lot. Assume also that this time is normally distributed with a standard deviation of 2 minutes. Find the probability that a randomly selected college student will take between 2

QUEST ION 24 1 points    Saved

of 2 minutes. Find the probability that a randomly selected college student will take between 2 and 6 minutes to find a parking spot in the main parking lot.


0.4772 0.4332 0.6247

A company markets educational software products and is ready to place three new products on the market. Past experience has shown that for this particular software, the chance of “success” is 80%. Assume that the probability of success is independent for each product. What is the probability that exactly 1 of the 3 products is successful?

0.80 0.032 0.24 0.096

QUEST ION 25 1 points    Saved

Horatio Oscar Vineeth Lane (HOV Lane for short) records his commute times for a period of one month and assigned them to five different categories as shown in the table. 

What kind of probability is demonstrated if Mr. Lane is asked to predict the duration of his next commute?

subjective probability conjecture probability objective probability reflexive probability

QUEST ION 26 1 points    Save Answer

________ probability is an estimate based on personal belief, experience, or knowledge of a situation.

Binomial Subjective Marginal Joint

QUEST ION 27 1 points    Saved

QUEST ION 28 1 points    Saved

A fair die is rolled nine times. What is the probability that an odd number (1, 3, or 5) will occur less than 3 times?





A ________ probability distribution indicates the probability of r successes in n trials. joint subjective marginal binomial

QUEST ION 29 1 points    Saved

A ________ probability is the probability of a single event occurring. subjective binomial marginal joint

QUEST ION 30 1 points    Saved

An automotive center keeps tracks of customer complaints received each week. The probability distribution for complaints can be represented as the table shown below. The random variable xi represents the number of complaints, and p(xi) is the probability of receiving xi complaints. 

What is the average number of complaints received per week? 2.12 3.32 4.12 2.83

QUEST ION 31 1 points    Saved

The weight of a jar of jelly is normally distributed with a mean of 16 oz and a standard deviation of 0.02 oz. What is the probability that a jar of jelly contains less than 16 oz?




QUEST ION 32 1 points    Save Answer


A professor would like to assign grades such that 5% of students receive As. If the exam average is 62 with a standard deviation of 13, what grade should be the cutoff for an A? (Round your answer.)

80 83 90 93

QUEST ION 33 1 points    Saved

Under the normal curve, the area between z = 2 and z = ­2 includes ________ of the values. 98% 96% 95% 93%

QUEST ION 34 1 points    Saved

The owner of a seafood market determined that the average weight for a crab is 1.6 pounds with a standard deviation of 0.4 pound. What weight is exceeded by 2% of all of the crabs? (Assume the weights are normally distributed.)

0.78 pounds 1.82 pounds 2.42 pounds 4.36 pounds

QUEST ION 35 1 points    Save Answer

The expected value of the standard normal distribution is equal to: 0 1 1.5 2

QUEST ION 36 1 points    Save Answer

Mutually exclusive events are events with identical probabilities. events that have no outcomes in common. events that have no effect on each other. events that are represented in a Venn diagram by two overlapping circles.

QUEST ION 37 1 points    Saved

Experiments with repeated independent trials will be described by the binomial distribution if each trial result influences the next. each trial has exactly two outcomes whose probabilities do not change. the trials are continuous. the time between trials is constant.

QUEST ION 38 1 points    Saved

Objective probabilities that can be stated prior to the occurrence of an event are deterministic or probabilistic. subjective or objective. classical or a priori. relative or subjective.

QUEST ION 39 1 points    Saved

In a binomial distribution, for each of n trials, the event time between trials is constant. always has the same probability of occurring. result of the first trial influence the next trial. trials are continuous.

QUEST ION 40 1 points    Saved

For some positive value of Z, the probability that a standard normal variable is between 0 and Z is 0.2910. The value of Z is:

0.17 0.81 1.25 1.65

QUEST ION 41 1 points    Saved

Employees of a local company are classified according to gender and job type. The following table summarizes the number of people in each job category.  

If an employee is selected at random, what is the probability that the employee is female given that the employee is a salaried staff member?

QUEST ION 42 1 points    Save Answer

given that the employee is a salaried staff member? .50 .60 .625 .70

A fair die is rolled 8 times. What is the probability that an even number (2, 4, or 6) will occur between 2 and 4 times?





QUEST ION 43 1 points    Saved

A ________ probability is the probability that an event will occur given that another event has already occurred.

subjective objective conditional binomial

QUEST ION 44 1 points    Saved

The events in an experiment are ________ if only one can occur at a time. mutually exclusive non­mutually exclusive mutually inclusive independent

QUEST ION 45 1 points    Saved

In Bayesian analysis, additional information is used to alter the ________ probability of the occurrence of an event.

marginal conditional binomial revised

QUEST ION 46 1 points    Saved

The metropolitan airport commission is considering the establishment of limitations on noise pollution around a local airport. At the present time, the noise level per jet takeoff in one neighborhood near the airport is approximately normally distributed with a mean of 100 decibels and a standard deviation of 3 decibels. What is the probability that a randomly selected jet will generate a noise level of more than 105 decibels?

QUEST ION 47 1 points    Saved

Click Save and Submit to save and submit. Click Save All Answers to save all answers.

Save All Answers   Save and Submit

selected jet will generate a noise level of more than 105 decibels? 0.0228 0.0475

0.0485 0.0500

A frequency distribution is an organization of ________ data about the events in an experiment.

quantitative integer qualitative unknown

QUEST ION 48 1 points    Saved

custom thesis personal statement writer write my thesis

the science of shopping malcolm gladwell

English 100 Peer Review

Leslie Escalante

English 100

Professor Anna Morrison

October 8, 2017

Consumer Surveillance

            We have all heard the saying, “Money can’t buy happiness”. While this may be true when considering love, honesty, or knowledge, it doesn’t apply to objects such as a home, clothes, or a car. Although money cannot buy us safety, we can buy a security system to make us feel safer. In Malcolm Gladwell’s “The Science of Shopping” (Maasik, p. 93), Gladwell holds a discussion about how the retail industry has monitored consumer purchases and manipulated their entire shopping experience. I refute Gladwell’s claim, stating that the surveillance of consumers by retail anthropologists is manipulative and unethical. The surveillance of consumers has allowed the industry to target consumer needs, boost economic growth, and create conformity within all stores.

            To begin, going into a mall we may have one thing on mind. Sometimes we may walk out with just that one item, other times we come out with more than expected. Gladwell explains how shopping malls have strategically placed similar stores far from each other to get consumers to run around and pass by stores they weren’t interested in. Although the retail industry has a negative connotation stuck to it because they are seen as money hungry individuals, it is the only industry where we can buy everything we could ever want. The reason shopping malls create this “manipulated floorplan” is because after countless experiments of marketing, it has worked time after time. Research Psychologist, Kit Yarrrow, wrote a journal entitled, “Why “Retail Therapy” Works, in which she states that half of America has admitted to contributing to buying objects to feel good about themselves. Yarrow explains how Retail Therapy allows people to feel creative, successful, and relaxed. When we feel out of the loop, we look for somewhere to input ourselves to feel complete. While some may engage in drugs, others shop, therefore the manipulated design of the mall of a single store allows them to explore their options.

In continuation, the retail industry is also seen as a negative industry that is only focused on making money. This industry holds over forty-two million jobs in the United States, according to the National Retail Federation. Monitored consumer surveillance has allowed marketers to see what consumers actually need. The National Retail Federation states that it accounts, “$1.6 trillion in labor income and contributes $2.6 trillion annually to U.S. GDP”. If this industry was any other way, our economy could not function the way it does. A drastic missing income such as this would upset a community. This “evil, manipulated, selfish” community has allowed many individuals to have jobs and support our families.

Lastly, change is inevitable. Change occurs anywhere and everywhere. Gladwell argues that all stores have the same setup and are organized to make consumers look at more merchandise. Although I agree with Gladwell on stores having the same setup, I don’t believe it manipulates consumers into buying more objects. Consumer needs change therefore they won’t want to buy random items that have nothing to do with their trip to the store. Stores have fallen into conformity, allowing consumers to speak about what they want and need, instead of the industry imposing themselves on consumers.

In conclusion, although retail does take in input from their marketing management, the surveillance of consumers by retail anthropologists is not manipulative nor unethical. Retail uses their tools to give consumers what they want when shopping, by allowing them to explore their options using surveillance. Also, the industry, as a whole, contributes to a large portion of our economy and without it we would deteriorate. Conformity is also a big factor in the industry that determines what products are presented to consumers. We, as a society, have the power and voice to tell retail what we want. We are not being manipulated to buy anything we don’t want, we are just being presented the future.

Works Cited

Yarrow, Kit. “Why ‘Retail Therapy’ Works.” Psychology Today, Sussex Publishers,

2 May 2013,

“Retail Means Jobs.” National Retail Federation,

5 Mar. 2014,

Gladwell, Malcolm. “The Science of Shopping.” The New Yorker-Archive,

 4 Nov. 1996,

1. I like this because (be specific):

Base 1:  Unity

Is there a clearly stated thesis in the introductory paragraph?

Do all the supporting paragraphs back up the thesis?

Your comments:

Base 2: Support

Is there specific evidence?

Is there plenty of it?

Your comments:

Base 3: Coherence

Is there a clear method of organization? (List of items or a time order?)

Are transitions used to connect sentences and ideas?

Your comments:

Base 4: Sentence Skills

Are there any rough spots where the sentences do not flow smoothly and clearly?

Are there any mistakes in grammar, punctuation, or usage?

Your comments:

Feel free to quote a small portion (1-3 sentences) of the student’s post and comment on that.  It is also a good idea to ask your fellow students questions to lead to further communication on the discussion boards.  Peer reviews of at least two other students’ rough drafts should be approximately 150 words each.  

Nicole Conde

Professor Anna Morrison

English 100

08 October 2017

The Refute of Surveillance of consumers being manipulative and unethical.

I refute the claim that the surveillance of consumers by retail Anthropologists is manipulative and unethical. There are many benefits for monitoring for the customer’s interest. Consumers have been aware for years that they are being watched by surveillance cameras, and have continued to shop, especially where they feel it is of convenience. The surveillance and monitoring of customers in retail can be beneficial to the customer’s specific needs, can give a more efficient layout of the store, and can improve company profit as well.

If we as consumers are being monitored for the products we purchase most, therefore, the customer will know it is most likely going to be in that particular store they shop at. There are certain products, customers including myself that like to be purchased on a regular basis. According to Ray Burke, in the story, “Ted x Talks,” Our actions show what we desire and how we shop and why we buy. These tools inspire store efficacy and shop ability for the costumer. Data cameras measure shoppers studying them in their natural environment and look at their behavior. This can improve the customer experience and satisfaction.” Some stores may carry brands that other stores do not carry which makes it inconvenient for the shopper. Having to go to several stores to get the items you need can be time consuming, which can cause for the customer to shop elsewhere. There are certain rewards programs that go with the monitoring of the consumer shopping which has benefited customers with coupons for the items they buy the most. This is beneficial for customers who might want or need items at a discount. Without the surveillance tracking, this would otherwise not be a given convenience.

Having record of customer satisfaction through surveillance can help organize the products in a store. This can help the company know the best set up that fits the needs of their customer. When a customer wants to find a product, it is important for the organization and flow, to go through the store. “Ever wonder why the season’s hottest new styles at stores like the Gap are usually displayed on the right at least fifteen paces in from the front entrance? It’s because that is where shoppers are most likely to see them as they enter the store, gear down from the walking pace of a mall corridor, and adjust to the shop’s spatial environment. Ever wonder how shop managers know this sort of thing? It’s because, as Malcom Gladwell reports here, they hire consultants like Paco Underhill, a retail anthropologist and urban geographer whose studies (often aided with cameras) of shopping behavior have become valuable guides to store managers looking for the best ways to move the goods.” Para 1 (pg93) With the busy schedules individuals have, their time is limited and they want to go in, get what they need, and get out. This organizational style is attracted by consumers, whether it is in shopping stores of the mall for clothes or toy stores or it can be very beneficial in the grocery stores as well. The organization can also guide the consumer to the sale items which are beneficial for people needing to save money. Clearance and sale sections are best if noticeable when the customer first walks in so they know that some of the items they were wanting might have a better deal than their completion. When a store monitors how the customer shops in each isle and their reactions, of time spent, purchases made, and satisfaction, it brings the customer back to the store. Given at a local “TEDx event,” produced independently of the TED Conferences. “Why are companies so intent on using technology to track our behavior? Our actions reveal what we desire, how we shop, and why we buy. Retailers can now learn so much more about shopper behavior than ever before, and while these “big data” applications create concerns about privacy, the detailed data can be used to design stores, product offerings and promotions that connect with our interests, speed up the shoppingprocess, and help us find items we will buy. These new toolsare critical to improving store efficiency and shop ability; and offer a vision of the future of retailing.” This video relates to all of the customers who want that convenience of availability, and efficacy of being able to find the products needed and to find them efficiently. The lack of products can deter the consumer’s away forcing them to shop at other stores.

  Company profit can be a result of surveillance of their customer’s choices in items. Depending on the inventory bought, this tells the company that this is what is in demand. The consumer is satisfied as well as the company, for they both reap of the benefits of the merchandise in the store and the sales of those in high demand products. If this technique helps a company profit by selling what we are most interested in buying, then consequently, that is a win, win situation. Stores take pride in the satisfaction of their customers and want the best experience possible that they can give them.

If the consumers shopping experience can be enhanced, or made more convenient, then the surveillance by retail Anthropologists can be beneficial. If this makes shopping for the

consumer a more pleasant experience therefore, this would not be manipulative or unethical, but rather be a positive reflection of what the companies’ research of customers has shown over the past decades. According to the story of “Envirosell, the Science of Shopping,” Paco Underhill started the Envirosell shopper research. He had filmed everything while also speaking with shoppers about their shopping experience. This method did not exist until this research was born twenty-five years ago.” I believe customer satisfaction relies heavily on the current, most popular product availability and the ability to shop in a pleasant, safe, and an organized environment.

1. I like this because (be specific):

Base 1:  Unity

Is there a clearly stated thesis in the introductory paragraph?

Do all the supporting paragraphs back up the thesis?

Your comments:

Base 2: Support

Is there specific evidence?

Is there plenty of it?

Your comments:

Base 3: Coherence

Is there a clear method of organization? (List of items or a time order?)

Are transitions used to connect sentences and ideas?

Your comments:

Base 4: Sentence Skills

Are there any rough spots where the sentences do not flow smoothly and clearly?

Are there any mistakes in grammar, punctuation, or usage?

Your comments:

Feel free to quote a small portion (1-3 sentences) of the student’s post and comment on that.  It is also a good idea to ask your fellow students questions to lead to further communication on the discussion boards.  Peer reviews of at least two other students’ rough drafts should be approximately 150 words each.  

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asu sona

ASU Department of Psychology College of Liberal Arts & Sciences 9/30/2015

PSY 101 Sona Research Requirements

Completion of Report Credits

Report credit is awarded in units of 1 credit. A summary (350 words) of a research report of any length in a journal published by the American Psychological Association (APA) or the American Psychological Society (APS) if done appropriately earns 1 credit. The journals cover all of the major subfields of Psychology such as Social, Clinical, Developmental, Cognitive, and Behavioral Neuroscience.

1. If you choose to fulfill all hours of credit by satisfying the Report Credit option, you bypass the Research Study Participation Credit option entirely.

2. If you choose to fulfill part of your credit requirement with the Report Credit option, log onto the Sona system to satisfy the remainder of the credit.

3. To obtain report credit, you should read a scientific article from the list below and write a report. A 350 word report on a journal article receives 1 credit. THE REPORT MUST BE WRITTEN IN YOUR OWN WORDS AND GO BEYOND THE ARTICLE ABSTRACT.

Since most articles have an Introduction, Method, Results, and Discussion section, we recommend that your follow this structure in your report:

What the researcher expected to find; study procedure and important independent variables and dependent variables; major result or findings of the study; main conclusion(s) of the study; and what you liked and disliked about the article or study.

4. Give the report (or reports) to your instructor for approval. Since all credit is due by the day of your last class, these reports should be given to your instructor at least 48 hours earlier so that the instructor can evaluate the report and give you credit.

5. Be sure to attach a photocopy of the journal article you review.

The list of approved journals and how to locate them is in the information below.

• Choose a journal title that interests you. • Go to the ASU Library website, and use Journal Lookup to find the journal online and to browse

its contents. • Pick an article (or articles) that interest you to write up your summary (or summaries). Send

your summary (or summaries) in a Word document. • Be sure to download the article, so that you can print it out and give it to your professor with

your report or if your professor allows electronic copies send it with your summary as an email attachment (links will not work, due to your unique log-in information).

ASU Department of Psychology College of Liberal Arts & Sciences 9/30/2015 You may also go to the following websites to obtain lists of journals that may be used for Report Credit: (click on red ‘search’ button for hundreds of journal articles stored at the ASU online reference library!)

Journal list for Report Credits:

Journal of Experimental Psychology Journal of Personality & social Psychology Developmental Psychology Perception and Psychophysics Journal of Social Psychology Social Psychology Quarterly Journal of Experimental Social Psychology Learning and Motivation Cognitive Psychology Journal of Applied Social Psychology Journal of the Experimental Analysis of Behavior Journal of Comparative and Physiological Psychology Journal of Applied Behavioral Science Journal of Memory and Language Journal of Abnormal Psychology Child Development Journal of Consulting and Clinical Psychology Psychological Assessment Journal of Conflict Resolution Journal of Experimental Research in Personality Journal of Personality Psychology and Aging Health Psychology Memory and Cognition Bulletin of the Psychonomic Society Personality and Social Psychology Bulletin Merrill-Palmer Quarterly Brain Research Brain Research Reviews Journal of Pharmacology and Experimental Therapeutics Journal of Neuroscience Life Sciences Neuroscience Neuroscience Letters Psychopharmacology- Berlin

You may also go to the non-susbscriber section of following website to obtain lists of journals that may be used for Report Credit:

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how to increase contribution margin in capsim

1 © 2011 Capsim Management Simulations, Inc. All rights reserved.

Capstone® Debrief Rubric Report

Table of Contents

How to Use This Report ……………………………………………………………………………………………………………….. 2

Sample Report …………………………………………………………………………………………………………………………….. 3

The Company Rubric ……………………………………………………………………………………………………………………. 4 ROS ………………………………………………………………………………………………………………………………………… 4

EPS (Earnings Per Share) …………………………………………………………………………………………………………… 5

Contribution Margin ………………………………………………………………………………………………………………… 5

Change in Stock Price ……………………………………………………………………………………………………………….. 6

Leverage …………………………………………………………………………………………………………………………………. 6

Stock Price ………………………………………………………………………………………………………………………………. 7

Bond Rating …………………………………………………………………………………………………………………………….. 8

Emergency Loans …………………………………………………………………………………………………………………….. 8

Current Ratio …………………………………………………………………………………………………………………………… 9

Inventory Reserves…………………………………………………………………………………………………………………. 10

Plant Purchases Funded ………………………………………………………………………………………………………….. 11

Accounts Receivable ………………………………………………………………………………………………………………. 12

Accounts Payable …………………………………………………………………………………………………………………… 13

Asset Turnover ………………………………………………………………………………………………………………………. 14

Sales to Current Assets …………………………………………………………………………………………………………… 14

Overall Plant Utilization ………………………………………………………………………………………………………….. 15

Stock Outs (Company level) …………………………………………………………………………………………………….. 15

Bloated Inventories ………………………………………………………………………………………………………………… 16

Overall Actual vs. Potential Demand ………………………………………………………………………………………… 16

Cost Leadership ……………………………………………………………………………………………………………………… 16

Product Breadth …………………………………………………………………………………………………………………….. 17

Market Share Overall ……………………………………………………………………………………………………………… 17

Overall Awareness …………………………………………………………………………………………………………………. 18

Overall Accessibility ……………………………………………………………………………………………………………….. 18

Overall Design ……………………………………………………………………………………………………………………….. 19

Asset Base …………………………………………………………………………………………………………………………….. 19

2 © 2011 Capsim Management Simulations, Inc. All rights reserved.

The Product Rubric ……………………………………………………………………………………………………………………. 19 Positioning ……………………………………………………………………………………………………………………………. 19

Age ………………………………………………………………………………………………………………………………………. 20

Reliability ………………………………………………………………………………………………………………………………. 20

Price Percentile ……………………………………………………………………………………………………………………… 21

Awareness …………………………………………………………………………………………………………………………….. 21

Accessibility …………………………………………………………………………………………………………………………… 22

Customer Survey Score …………………………………………………………………………………………………………… 22

Potential Share/Average Share ………………………………………………………………………………………………… 23

Actual Share/Potential Share …………………………………………………………………………………………………… 23

Plant Utilization ……………………………………………………………………………………………………………………… 24

Automation …………………………………………………………………………………………………………………………… 24

Contribution Margin ………………………………………………………………………………………………………………. 24

Days of Inventory …………………………………………………………………………………………………………………… 24

Promotion Budget ………………………………………………………………………………………………………………….. 25

Sales Budget ………………………………………………………………………………………………………………………….. 25

R&D Utilization ………………………………………………………………………………………………………………………. 25

Overall Product Evaluation ……………………………………………………………………………………………………… 25

Summary Rubrics ………………………………………………………………………………………………………………………. 26

How to Use This Report

The Capstone® Debrief Rubric Report offers a comprehensive evaluation of a company and its products.

It is prepared as a rubric, with each item in the report scored on a scale of zero to three: • Excellent – 3 points • Satisfactory – 2 points • Poor – 1 point • Trouble – 0 points

There are seven categories ranging from “Margins & Profitability” to individual products. Each line item is discussed below, beginning with how the item was scored.

To make quick use of the report, scan it for zeros. Find the description below to learn why the company earned a zero. We recommend having a Capstone Courier at your disposal as you interpret the results.

3 © 2011 Capsim Management Simulations, Inc. All rights reserved.

Sample Report

DEBRIEF REPORT 2013 Ferris C42681

COMPANY RUBRIC Points (0..3)

Margins & Profitability Asset Utilization ROS (Profits/Sales) 0 Asset turnover (Sales / Assets) 1 EPS (Earnings Per Share) 0 Sales to Current Assets 1 Contribution Margin 2 Overall plant utilization 2 Change in Stock Price 0 Total (Max 9) 4 Total (Max 12) 2

Ability to raise growth capital Forecasting Leverage 2 Stock outs 2 Stock price 0 Bloated inventories 2 Bond rating 1 Overall Actual vs. Potential Demand 3 Total (Max 9) 3 Total (Max 9) 7

Sound Fiscal Policies Competitive Advantage Emergency loans 3 Cost leadership 0 Leverage 2 Product breadth 3 Current Ratio 3 Market share 2 Inventory reserves 0 Overall Awareness 2 Plant purchases funded 3 Overall Accessibility 2 Accounts Receivable 2 Overall Design 1 Accounts Payable 2 Asset Base 3 Total (Max 21) 15 Total (Max 21) 10

PRODUCT RUBRIC Cake Cedar Cid Coat Cure Ch Cp Cs Overall Primary Segment Trad Low High Pfmn Size 0 Pfmn Size Positioning 1 3 2 2 2 0 1 1 2 Age 3 3 1 3 3 0 2 1 2 Reliability 0 0 0 0 0 0 0 0 0 Price Percentile 0 1 0 0 0 0 0 0 0 Awareness 2 2 3 3 3 0 2 2 2 Accessibility 2 2 0 2 2 0 2 2 2 CustomerSurveyScore 1 0 3 3 3 0 3 1 2 PotentialShare/Avg 1 1 3 3 3 0 0 0 1 ActualShare/Potential 3 2 3 3 2 0 2 2 2 PlantUtilization 3 3 3 2 2 0 0 0 2 Automation 0 0 1 2 2 0 2 2 1 ContributionMargin 0 0 0 0 0 0 0 0 0 Days of Inventory 2 2 2 1 2 0 0 0 1 Promotion Budget 0 0 3 3 3 0 3 3 2 Sales Budget 0 0 3 3 3 0 2 2 2 R&D Utilization 0 0 0 0 0 0 0 0 0 Total (Max 48) 18 19 27 30 30 0 19 16 21

4 © 2011 Capsim Management Simulations, Inc. All rights reserved.

The Company Rubric

ROS Return on Sales (Profit/Sales) answers the question, “How much of every sales dollar did we keep as profit?”

Excellent ROS > 8% Satisfactory 4% < ROS <=8% Poor 0% < ROS <= 4% Trouble ROS <= 0%

Between 0% and 4%, while the company is at least making a profit, it is not bringing in sufficient new equity to fund growth. The industry is growing at about 15% per year. The industry consumes about 15% more capacity each year, which arrives in the form of plant expansions and new products. Therefore, as the simulation begins, an average company would add about $12 million in new plant each year. If half that or $6 million was funded with bonds, an average company would need about $6 million in new equity. Therefore, if the company does not have the profits, it must either issue $6 million in new stock, or $12 million in bonds, or not grow to keep up with demand. Worse, if it has no profits, its stock price falls, making it difficult to raise equity through stock issues.

This ignores investments in automation, which also require a funding mix of equity and debt.

In the opening round of Capstone® companies have an excess of assets, and that can convert idle assets into productive ones. Therefore, do not worry too much if the company’s profits are low. But after year 3, expect that idle asset cushion to be gone. Profits become critical because those companies with profits can grow, and those without cannot.

What if profits are negative? The company is destroying equity. Its stock price has plummeted, making it more difficult to raise equity. All of the problems described above are now accelerated. In short, trouble.

How can companies improve ROS? Here are a few questions to pose.

1. Can you raise prices? 2. Can you reduce your labor costs? Your material costs? 3. Can you forecast sales better and thereby reduce your inventory carrying expenses? 4. Have you pushed your promotion or sales budgets into diminishing returns? 5. Can you sell idle plant to reduce depreciation? Alternatively, can you convert idle plant into

some other productive asset, like automation or new products? 6. Is your leverage too high, resulting in high interest expenses. (See leverage.)

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EPS (Earnings Per Share) EPS (profits/shares outstanding) answers the question, “What profits did each share earn?” EPS is a driver of stock price, and stock issues are an important source of growth capital.

Excellent EPS > $2 + Round # Satisfactory ($2 + Round #)/3 < EPS <= $2 + Round # Poor $0.00 < EPS < ($2 + Round #)/3 Trouble EPS <= $0.00

In the table, “Round #” refers to the year in the Capstone®. Round 1 is year 1, round 2 is year 2. The market is growing, and so should profits. In Round 5, for example, an excellent EPS would be ($2 + $5) = $7.00 per share, and a satisfactory EPS would be at least 1/3 that or $2.33.

EPS is important for three reasons. First, profits bring new equity into the company. Second, EPS drives stock price, and the company can issue shares to bring in new equity. Third, any new equity can be leveraged with new debt.

An example may help. Suppose the company wants to invest $15 million in new plant and equipment each year for the next three years. If its profits are zero and it issues no stock, the purchases would need to be funded entirely with bonds. But this would drive up interest expense, and worse, eventually the company would reach a ceiling where bond holders would give it no additional debt. The company would stop growing.

In the end, a company’s growth is built upon equity. If it has equity, it can get debt, too.

How can companies improve EPS? Improve sales volume while maintaining margins. EPS is closely linked with the Asset Utilization and Competitive Advantage categories.

Contribution Margin Contribution margin is what is left over after variable costs. Variable costs include the cost of goods (material and labor) and inventory carrying expense.

The biggest expense is the cost of goods. If the contribution margin is 30%, then out of every sales dollar, $0.70 paid for inventory and $0.30 is available for everything else, including profits.

Excellent Contribution Margin > 35% Satisfactory Contribution Margin > 27% Poor Contribution Margin > 22% Trouble Contribution Margin < 22%

Fixed costs are those expenses that will be paid regardless of sales. They include promotion, sales budget, R&D, admin, and interest expenses.

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As the contribution margin falls below 30%, it becomes increasingly difficult to cover fixed costs.

How can a company improve its contribution margin? Guard price and attack material and labor expenses.

Change in Stock Price The change in stock price from one year to the next is an indicator for the long term growth potential of the company.

Excellent > $20.00 Satisfactory > $7.00 Poor > – $5.00 Trouble < – $5.00

If the stock price is increasing, the company will enjoy easier access to new equity via profits and stock issues, which in turn can be leveraged with additional bonds, and the combined capital can fund plant improvements and new products.

If the stock price is falling, it becomes increasingly difficult to obtain new investment capital, either equity or debt. Eventually the company’s ability to make improvements comes to a halt.

Leverage In Capstone® Leverage is defined as Assets/Equity. (It is sometimes defined as Debt/Equity, but in either case, Leverage is addressing the question, “How much of the company assets are funded with debt?”) The higher the Assets/Equity ratio, the more debt is in the mix.

Using Assets/Equity, a Leverage of 2.0 means half the assets are financed with debt and half with equity. Read it as, “There are $2 of assets for every $1 of equity.” A leverage of 3 reads as, “There are $3 of assets for every $1 of equity.”

Excellent 1.8 < Leverage < 2.5 Satisfactory 1.6 < Leverage <1.8 , or 2.5 < Leverage < 2.8 Poor 1.4 < Leverage <1.6, or 2.8 < Leverage < 3.2 Trouble Leverage < 1.4, or Leverage > 3.2

It is easy to see why too much Leverage can cause problems. As debt increases, loans become more expensive. The company becomes high risk, and lenders eventually decline to lend the company money.

On the other hand, companies with a competitive advantage usually have a larger asset base than their competitors. For example, a broad product line implies a larger plant. A highly automated facility implies a large investment. Growing the company’s asset base quickly calls for prudent use of debt.

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Here is an example. Suppose Andrews has assets of $100 million, and Baldwin $125 million. Assume that each team is utilizing their assets productively. An observer will bet on Baldwin because its larger asset base translates into more products or more productivity. Now suppose that Andrews is leveraged at 2.0, and Baldwin at 2.5. If so, they both have $50 million in equity. By leveraging its equity, Baldwin gained an advantage.

Too little leverage can also indicate weakness, provided that investment opportunities exist. Think of it this way. When a company retires debt, it is saying to stockholders, “We are out of ideas for investments. The best we can come up with is to save you the interest on debt.” This will not impress stockholders, who are looking for a high return on their equity (ROE). An investor expecting a 20% ROE will be unhappy learning that their money was used to reduce debt at 10%.

ROS * Asset Turnover *Leverage = Price/Sales * Sales/Assets * Assets/ Equity = ROE. If the company can somehow hold its margins and productivity constant, increasing leverage improves ROE.

If leverage is falling, here are some things to suggest to the company.

1. Decide upon a policy towards leverage. For example, “Our leverage will be 2.5.” Adjust your leverage before saving your decisions. (Issue/retire debt, issue/retire stock, pay dividends.)

2. Find investment opportunities. For example, if the market is still growing, and you are already at a high plant utilization, you will need to add some capacity each year. Or perhaps you can add a new product. Fund these investment opportunities with a mix of debt and equity consistent with your policy.

3. In the latter rounds of Capstone® you are likely to become a “cash cow”. You discover that you have excess working capital that cannot be put to good use. In the real world management might get into new businesses, but in Capstone® there are no such alternatives. In this case, make your stockholders happy by buying back stock or paying dividends to maintain the leverage.

Stock Price Stock price is a function of book value, EPS and the number of shares outstanding. Book value sets a floor, although negative earnings can depress stock price below book. Stock price can also be negatively impacted by emergency loans. In the absence of losses and emergency loans, Capstone’s stock price is primarily a function of past and present EPS.

Excellent Stock price > $40 + 5 * Round number Satisfactory Stock price > $25 + 5 * Round number Poor Stock price > $10 + 5 * Round number Trouble Stock price < $10 + 5 * Round number

In the table, “Round Number” refers to the year in the Capstone®. Round 1 is year 1, round 2 is year 2. The market is growing, and so should profits. As time passes and EPS increases, we should expect stock price to increase.

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Stock price is important because, ultimately, equity drives the company’s ability to raise capital for growth. Even if it never issues a share, a rising stock price means it is accumulating profits as retained earnings. More equity means that it can raise additional debt, and together its mix of debt and equity fuels the company’s growth.

Also see the discussion for EPS and Leverage.

Bond Rating The bond ratings are, from best to worst, AAA, AA, A, BBB, BB, B, CCC, CC, C, DDD. Bond ratings are driven by leverage. As bond ratings fall, interest rates climb on both short term and long term debt.

As the bond rating decays, bond holders become reluctant to give the company additional debt. This sets a limit on the company’s ability to acquire additional assets, particularly automation, capacity, and new products.

Since leverage is a function of equity, the bond rating is in some sense derived from equity. Companies can improve their bond rating by adding equity, either as a stock issue or as profits. The more equity they have, the more debt they can raise, and the bigger their asset base.

Alternatively, companies can improve their bond rating by reducing debt. However, reducing debt also implies shrinking the asset base. While there are always exceptions to the rule, shrinking the asset base in a growing market would be limiting to growth.

Excellent AAA, AA, A Satisfactory BBB, BB, B Poor CCC, CC, C Trouble DDD

Emergency Loans If a company is out of cash on December 31st, a character in the simulation, Big Al, arrives to give it just enough money to bring its cash balance to zero. The company pays Big Al its short term interest rate plus a 7.5% premium. Stock price also falls – how much depending upon the severity of the loan.

Excellent No emergency loan Satisfactory Emergency loan less than $1 million Poor Emergency loan less than $8 million Trouble Emergency loan greater than $8 million

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The great majority of emergency loans are rooted in three mistakes.

1. The company purchased a plant, but did not fund it adequately. 2. The company forecasted too much demand, and when it did not materialize, its inventory

expansion exceeded reserves. 3. The company neglected to fund your current assets adequately, usually because it brought its

current debt to zero.

You can also direct students to the online Team Member Guide, and the Analyst Report, where emergency loans are also discussed at some length.

While painful, an emergency loan that purchased assets is not destructive so long as the assets are useful. After all, the company could have and should have funded the assets with cheaper debt. It now has an asset at its disposal, even though it overpaid for it.

However, there is another cause of emergency loans – sustained negative profits. The company is, well, a zombie, kept in motion by transfusions from the deep pockets of Big Al. The only advice we can offer here is, intervene before the company joins the walking dead. If profits are negative two years in row, intervene to improve margins and reverse the trend.

Current Ratio Current Ratio is defined as Current Assets/Current Liabilities, which in turn is (Cash + A/R + Inventory) / (A/P + Current Debt). From a banker and vendor’s point of view, it answers the question, “How likely am I to get my money back?”

Excellent 1.8 < Current Ratio <= 2.2 Satisfactory 1.6 < Current Ratio <=1.8, or 2.2 < Current Ratio <= 2.4 Poor 1.3 < Current Ratio <=1.4, or 2.4 < Current Ratio <= 2.7 Trouble Current Ratio < 1.3, or Current Ratio > 2.7

Like any asset, current assets are paid for with a mix of debt and equity. The debt is Accounts Payable and Current Debt, which we can think of as “short term funding”. The balance is “long term funding”, and it is probably equity, but it could be long term debt. More precisely this long term funding is Working Capital, which is defined as Current Assets – Current Liabilities.

What should the Current Ratio be? While that is a policy decision, we suggest starting with the debt/equity mix of the entire company. If the mix is 50/50 overall, why would the company have a different policy for Current Assets? If Current Assets are funded half with Current Liabilities and half with equity, then the Current Ratio is 2.0.

Where does trouble begin? A Current Ratio of 1.0 says that Current Assets are funded entirely with Current Liabilities. Bankers and Vendors are very worried, and are likely to withhold additional funding. They do not begin to relax until the ratio reaches 1.3, which in effect says for every $1.30 of current assets they fund $1.00. By 1.6 they remain watchful but are less concerned, and at 1.8 they are happy to lend money or offer credit.

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However, trouble exists at the high side, too. A Current Ratio of 3.0 says that the company has $3.00 of assets for every $1.00 of debt, and therefore $2.00 of current assets are being funded with long term money. But if long term money is tied up with current assets, it cannot be used to fund long term assets – capacity, automation, and new products.

Consider a stockholder. The stockholder knows that he/she gets no return on current assets. Stockholders make no return on Cash, on Accounts Receivable, or on inventory. In some sense they are necessary evils. Stockholders recognize the necessity of current assets, but if they expect a 20% return on their investment, they would rather the company borrow money from a bank at 10% so their money can be invested in wealth producing assets – capacity, automation, and new products. A stockholder wants to see a low Current Ratio, while vendors want to see a high Current Ratio.

It follows from this reasoning that paying current debt to $0 is a mistake. The question companies must answer is, “How much current debt should be in the mix?”

In the real world, bankers will typically fund up to 75% of Accounts Receivable and 50% of inventory. Using this as a rule of thumb, here is a quick method to arrive at Current Debt before a company saves decisions.

1. Drive the proforma financial statements into a “worst case scenario”. In the worst case, the pessimistic unit sales forecast is put into the Marketing worksheet, and the best case unit sales forecast into the Production schedule. In the worst case, the proforma balance sheet ‘s inventory is at a maximum.

2. Looking at the proforma balance sheet, calculate 50% of the inventory and 75% of the Receivables.

3. On the Finance sheet, enter the result as Current Debt for next year.

Companies will discover that if its policy towards A/R is 30 days, its policy towards inventory is 90 days, and it has $1 of cash, then a policy of A/P at 30 days, and current debt at 75% of A/R and 50% of inventory, will give it a Current Ratio of about 2.0.

Inventory Reserves Inventory expansions are the number one cause of emergency loans. This can be further broken down into two root causes – forecasting, and inadequate inventory reserves.

By inventory reserves we mean, “How much inventory are we willing to accumulate during the year in our worst case?” We express this as “days of inventory.”

Suppose the gross margin is 30%. If so, then the cost of inventory consumes 70% of every sales dollar. If sales are $100 million, over the course of a year the company spends $70 million on inventory. In one day it spends $191 thousand. In 30 days it spends $5.7 million. In 90 days $17.3 million.

We are interested in how many days of inventory the company planned to be able to absorb, because if inventory expanded beyond this, it would see Big Al for an emergency loan.

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Excellent 75 to 105 days of inventory Satisfactory 55 to 75 days, or 105 to 135 days of inventory Poor 30 to 55 days, or 135 to 160 days of inventory Trouble Below 30 days or more than 160 days of inventory

To find inventory reserves we determine cash and inventory positions on January 2nd, after all the dust has settled from borrowing, stock issues, bond issues, debt retirement, etc.

Inventory reserves in days = ((Starting Cash + Starting Inventory)/COG) * 365. For example, if starting cash and inventory totaled 30 million on January 2nd, and annual cost of goods is expected to be $120 million, then days of inventory was $30/$120 * 365 or 91 days.

If the company sells its entire inventory, it converts it all to cash. The more inventory accumulated, the more that cash is crystallized as inventory. Eventually the company runs out of cash and turns to Big Al to pay for the inventory that has accumulated in the warehouse.

Companies can develop an inventory reserves policy by considering their worst case forecast for sales. If the inventory policy is 90 days, they can plan the production schedule so that they will have (1 + 90/365) = 125% of their worst case forecast, including any starting inventory.

Companies cannot predict what competitors will do in detail. Therefore, companies plan for the worst and hope for the best.

Trouble is highly likely to occur when inventory reserves are less than 30 days. The company may get away with it, but that requires both precise forecasting and predictable competitors or, more likely, lots of luck.

Trouble appears in a different form when inventory reserves exceed 160 days. Now the company has idle assets, which should either have been put to work or given back to the stockholders.

Plant Purchases Funded Failure to fully fund plant purchase is the number two cause of emergency loans. The error occurs because companies often count on profits or perhaps inventory reductions that do not materialize.

Excellent Fully funded Satisfactory Funding shortfall is within $4 million Poor Funding shortfall is within $8 million Trouble Funding shortfall is greater than $8 million

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Funding sources include:

1. Depreciation 2. Stock issue 3. Bond issues 4. Excess current assets

Depreciation often confuses students. While we do pay cash for expenses like promotion or inventory, we never actually pay cash for depreciation. And yet governments allow businesses to deduct depreciation as an expense, thereby reducing profits and taxes. Why?

Governments want businesses to continue to pay taxes, and they agree that equipment wears out and must be replaced. The purpose of depreciation is to set aside a guaranteed cash flow that can be used for the purchase of new plant and equipment. Teams can successfully argue that cash from depreciation is a valid source of funding.

Stock and bond issues raise long term funds for any investment in the company.

Excess current assets can be defined as “anything greater than the current assets required to operate in our worst case scenario”. For our purposes, we assume that teams need a minimum of 90 days of inventory, 30 days of accounts receivable, and $1 of cash. Of course, teams might want to have deeper reserves, but in applying the rubric to Plant Purchases, we allow companies to apply anything above this minimum to plant purchases. We use the January 1st balance sheet (same as the December 31st balance sheet from last year’s reports) to discover starting current assets.

If the sum of the company’s funding sources is greater than its plant purchases, the company fully funded the purchase. If the shortfall is less than $4 million, it is plausible that its intention was to reduce the current asset base by $4 million. If the funding shortfall is $8 million, it is conceivable albeit unlikely that the shortfall was planned. Anything more than $8 million is cutting deeply into current assets, and will likely result in an emergency loan.

Accounts Receivable The accounts receivable policy affects both demand and the balance sheet. Companies express the policy in days. A 30 day policy means that accounts receivable will be 30/365 * Sales.

Excellent 45 to 60 days Satisfactory 30 to 45 days, or 60 to 75 days Poor 20 to 30 days, or 75 to 90 days Trouble Less than 20 days or more than 90 days

On the balance sheet, if a company expands A/R policy from 30 days to 60 days, it doubles A/R. In effect it gives a loan to customers, and in the process it incurs the additional expense of carrying that loan. For

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example, if accounts receivable expanded from $10 million to $20 million, and the company funded the expansion with short term debt at 10%, it would incur an additional $1.0 million in interest expense.

On the other hand, demand would increase by about 5% from $120 million to $126 million, while fixed costs would remain the same. Profits would increase by about $0.8 million after paying the additional $1 million in interest expense. And, of course, the additional $6 million in sales came out of competitors.

But there is a risk. It is trivial for competitors to copy A/R policies, and if that happens, the increase in demand is neutralized while everyone absorbs the additional $1.0 million in interest expense. The question then is, “Will competitors realize we have expanded our credit terms? All of them?”

Beyond 60 days, the incremental cost in interest exceeds the incremental gain in demand.

As companies shorten A/R policy, they effectively reduce the loan they have made to customers. Cash goes up, interest expense falls. However, customers want credit terms. If the company demands cash payment, demand falls to 65% of its potential.

These relationships are easily explored with the company’s Marketing worksheet. As they vary the A/R policy, they should watch the computer’s demand forecast.

Accounts Payable Accounts payable policy affects both parts deliveries and the balance sheet. Companies express the policy in days. A 30 day policy means that it pays vendors 30 days after it receives a bill.

Excellent 0 to 15 days Satisfactory 15 to 30 days Poor 30 to 45 days Trouble Over 45 days

On the balance sheet, if companies expand A/P policy from 30 to 60 days, it doubles A/P. In effect it extracts a loan from vendors on which its pay no interest. If payables expand from $10 million to $20 million, that means that it could borrow $10 million less from its banker, and if interest rates are 10%, it saves $1 million in interest expense.

However, vendors want to be paid. If they are not paid, they begin withholding parts deliveries. At 60 days, parts deliveries fall 8%. The company pays for the workforce, but it gets 8% less inventory to sell. In Round 1 this translates to about $2.35 million in wasted labor expense, and potentially missed sales from stockouts.

A policy between 0 and 15 days improves production about 2%. This translates to about 84 thousand units that the company in Round 1 that the company would not have had before. In effect, the labor cost on these units is free, a savings of $700 thousand, plus the contribution margin on these units, another $800 thousand.

These relationships are easily explored with the Production worksheet. As the company varies A/P policy, watch the impact upon total Production After Adjustments.

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Asset Turnover Asset Turnover or Sales/Assets answers the question, “For every dollar of assets, how many sales dollars do we generate?” We would like to generate as many sales dollars as possible.

Excellent ATO > 1.3 Satisfactory 1.0 < ATO <=1.3 Poor 0.8 < ATO <= 1.0 Trouble ATO <= 0.8

In Capstone®, 1.0 to 1.3 (that is, $1.00 to $1.30 of sales for every dollar of assets) is considered satisfactory. Anything over 1.3 is excellent. Between 0.8 and 1.0, chances are the company has idle assets.

Consider its starting Traditional product (Able, Baker, Cake, Daze, Eat, or Fast). In Round 0 it could produce 1.8 million units on first shift, yet demand was only 1.0 million units. Almost half the plant was idle. Its Sales/Assets ratio was depressed, dragging down the entire company’s Asset Turnover.

Below 0.8 the company is in trouble. Either sales are depressed, or the assets are unproductive, or both.

What can companies do to improve Asset Turnover? Fundamentally a company needs to increase demand or reduce the asset base. Many of the other items in the rubric drill down into these issues. Consider these questions:

1. Is the plant utilization on any product below 130%? (See plant utilization.) 2. Can the company make its products more competitive? (See Design, Awareness, Accessibility). 3. Are its current assets appropriate for its sales base? (See Sales to Current Assets).

Excellent Asset Turnover >1.3 Satisfactory 1.0 < Asset Turnover < 1.3 Poor 0.8 < Asset Turnover < 1.0 Trouble Asset Turnover < 0.8

Sales to Current Assets This ratio asks the question, “Given our sales base, do we have adequate current assets to operate the company?” Current assets are comprised of Cash, Accounts Receivable and Inventory. In the worst case scenario, cash has dwindled to $1 as inventory expanded. The accounts receivable policy (for example, 30 day terms) is a direct function of Sales.

Given the A/R policy in days, inventory policy in days, and sales, it is easy to calculate whether a company has adequate Current Assets to operate the company. For example, suppose the company projects worst case sales to be $120 million, sets A/R policy to 30 days, and is willing to carry 90 days of inventory. If its gross margin is 30%, then it will spend 70% * $120 million on inventory during the year,

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or $84 million, and a 90 day inventory policy translates to 90/365*$84 = $21 million. Accounts Receivable will be 30/365*$120 million = $10 million. In the worst case the company will have only $1 in cash. Current Assets = $1 + $10 million + $21 million = $31 Million. Sales/Current Assets = 3.8

Excellent 3.5 < Sales/Current Assets <4.5 Satisfactory 3.0 to 3.5, or 4.5 to 5.0 Poor 2.5 to 3.0, or 5.0 to 5.5 Trouble Sales/Current Assets < 2.5, or > 5.5

Too low a ratio risks a visit from Big Al. Too high a ratio indicates idle current assets which should either be put to work or given back to shareholders as a dividend or stock repurchase.

Overall Plant Utilization Overall Plant Utilization asks the question, “Are we working our plant hard?” It is calculated as Total Production / Total Capacity.

Excellent Plant Utilization > 1.7 Satisfactory Plant Utilization > 1.3 Poor Plant Utilization > 0.9 Trouble Plant Utilization < 0.9

It is easy to demonstrate that second shift is nearly always more profitable than first shift. This often surprises students who look at the 50% second shift wage premium and assume that second shift must be something to avoid. But suppose we only run one shift – by necessity it must pay all of the fixed costs – depreciation, R&D, Promotion, Sales Budget, Admin, and Interest. Anything on second shift only pays for the 50% premium on labor.

It follows that we want to run as much second shift as possible. In a perfect world, we would run two shifts, our best case demand forecast would come true, and we would have only one unit of inventory left at the end of the year. On the other hand, if we max out second shift, there is a good chance we could stock out, and stock outs are very costly. Therefore, 170% plant utilization or more is considered excellent and 130% satisfactory.

Stock Outs (Company level) Stock outs are HUGELY expensive. Consider a typical stock out. Demand is 500 thousand. The company stocks out at 400 thousand. The price is $30, and the unit cost is $21. Consider – the 400 thousand that were sold must have paid for all of the fixed costs – depreciation, R&D, Promotion, Sales Budget, Admin, and Interest. Therefore, the missed units would have only have paid for their cost of goods, contributing $900 thousand towards profit, been taxed at 35%, resulting in a $585 thousand net profit.

At the company level, we are interested in how many of the company’s products stocked out. (At the product level below, we will examine the individual stock out.) Chronic stock outs suggest problems with forecasting.

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Excellent No product stocked out Satisfactory 1 product stocked out Poor 2 products stocked out Trouble 3 or more products stocked out

Bloated Inventories We define a bloated inventory as any product that has more than 4 months of sales sitting in the warehouse.

While it is not uncommon to be taken by surprise by a competitor on a single product (perhaps a new product was introduced), if inventories are bloated across several products, the company is having difficulty forecasting demand.

Excellent No product had a bloated inventory Satisfactory 1 or 2 products with bloated inventories Poor 3 or 4 products with bloated inventories Trouble 5 or more products with bloated inventories

Overall Actual vs. Potential Demand The company worked hard to create the demand, but did it meet it?

Potential Demand tells companies what they deserved to sell based upon customer preferences. Actual demand is what companies actually sold, and it is often affected by stock outs.

If companies are not meeting potential demand, the problem is usually forecasting, and sometimes capacity shortages.

Excellent Met potential demand (or exceeded) Satisfactory Met 98% of potential demand Poor Met 96 % of potential demand Trouble Met less than 96% of potential demand

Cost Leadership Cost leaders attack the cost of goods, both material and labor costs. We can assess overall cost leadership by assess the average unit cost across the company’s product line.

Excellent < $18 – (Round #/4) Satisfactory <$20 – (Round #/4) Poor <$22 – (Round # /4) Trouble >$22 – (Round#/4)

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Over time we expect companies to become more efficient. The simulation advances the clock a year at a time, and a Round is one advance. Using the formula, an excellent average cost of goods in Round 2 is $17.50.

Companies can attack cost of goods by:

1. Reducing MTBF. 2. Placing products well behind the leading edge of the segment. The Material cost can be several

dollars cheaper per unit at the trailing edge versus the leading edge. 3. Automating to reduce labor costs

Product Breadth How many products does the company have in its line-up?

Consider this thought experiment. Suppose that there are four competitors in a segment and they all offer identical products. Each gets a 25% share. Now the “A” competitor adds a fifth identical product. “A’s” share becomes 40%. The gain was not free. “A” doubled its R&D, Promotion, Sales Budget, Admin costs, and it had to buy a new plant for its new product. But it has 40% share.

“B” likes this and adds a sixth identical product to the mix. Its share (and “A’s”) are now 33%. What should “C” and “D” do? If they match, everybody’s costs double. If they do not match, their share falls from 25% to 16%.

Product breadth also impacts accessibility. In Capstone® two products in a segment both contribute towards the Accessibility because two Sales Budgets are contributing instead of 1. You can only reach 100% accessibility if you have two or more products in the segment.

Excellent 7 or 8 products Satisfactory 4, 5 or 6 products Poor 3 products Trouble 1 or 2 products

Market Share Overall Overall market share is an indicator of strength or weakness. Companies began the simulation with a share of 1/#Teams.

Excellent 1.5 times average share Satisfactory 0.9 to 1.5 times average share Poor 0.6 to 0.9 times average share Trouble <0. 6 times average share

There is a synergistic relationship between falling share and expenses. Fixed costs do not vary much relative to sales from year to year. Fixed costs include R&D, Promotion, and Sales Budget. The R&D budget will be about the same whether the product is making $20 million in sales or $40 million in sales.

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But as market share slips, companies feel pressure to reduce these fixed costs. Trimming R&D, Promotion and Sales leads to reduced demand, which leads to lower share, then further trimming – a deadly spiral.

Overall Awareness Economists speak of “perfect information”. In Capstone® 100% awareness means that the product loses none of its attractiveness because some potential customers are not aware of it. Awareness answers two questions, “How many potential customers know about a product before they make a purchase decision? How difficult is it for them to discover a product offer?” If awareness is 75%, then 75% know about the product beforehand, and 25% have to work to discover it.

Attractiveness is expressed in the Customer Survey score. Products are evaluated on a scale of 0 to 100 on the four buying criteria – price, positioning, age, and reliability. A perfect product scores 100. If awareness is 100%, the perfect product keeps all 100 points. But as awareness falls, so does its product score. At 0% awareness, the perfect product is down to 50 points.

Excellent Average awareness > 85% Satisfactory Average awareness > 70% Poor Average awareness > 50% Trouble Average awareness < 50%

Overall awareness looks at the product line average awareness. A low average exposes a chronic problem with awareness.

Overall Accessibility Accessibility addresses the question, “How easy is it for customers to work with the company during and after the sale?” Accessibility translates into sales people, distribution centers, customer service departments, etc. If accessibility is 75%, then 75% of customers find it easy to work with the company, and 25% have problems ranging from getting through to a salesman to taking delivery.

Capstone® requires two products in a segment to reach 100% accessibility. With a single product, companies can reach 75% accessibility. This constraint is relaxed if the Advanced Marketing module is switched on, in which case teams are given direct access to their distribution channel budgets.

Like Awareness, Accessibility affects the Customer Survey score. Products are evaluated on a scale of 0 to 100 on the four buying criteria – price, positioning, age, and reliability. A perfect product scores 100. If accessibility is 100%, the product keeps all 100 points. But as accessibility falls, so does its product score. At 0% accessibility, the perfect product’s score is down to 50 points. At 75% accessibility, an otherwise perfect product would score 87.5.

Excellent Average accessibility > 70% Satisfactory Average accessibility > 60% Poor Average accessibility > 50% Trouble Average accessibility < 50%

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Overall accessibility looks at the product line’s average accessibility. A low average exposes a chronic problem with accessibility.

Overall Design In Capstone® product design includes Positioning, Age, and Reliability. They offer the customer “value”, which is then compared with Price. Overall design averages these three design attributes across the product line.

See the Product Rubric for Positioning, Age, and Reliability criteria. From an overall perspective, we average these rubric scores.

Excellent Average across design attributes > 2.5 Satisfactory Average across design attributes > 1.5 Poor Average across design attributes > 0.5 Trouble Average across design attributes <0.5

A low average exposes a chronic problem with design.

Asset Base Companies with a competitive advantage usually have a larger asset base than their competitors. For example, a broad product line or a highly automated plant implies a large investment in equipment. (See the discussion on Leverage.)

Over time we expect teams to accumulate more assets.

Excellent Assets > $84M + $20M * Round# Satisfactory Assets > $84M + $16M * Round# Poor Assets > $84M + $12M * Round# Trouble Assets < $84M + $12M * Round#

In the table, “Round #” refers to the year in the Capstone®. Round 1 is year 1, round 2 is year 2. The market is growing, and so should our asset base. In Round 5, for example, and excellent asset base would be $84M + $20M * 5 = $184M, and a satisfactory asset base would be at least $164M.

The Product Rubric

Positioning Positioning refers to the product’s placement on the Perceptual Map relative to the Ideal Spot in its primary segment. The closer a product is to the ideal spot, the more points it earns towards its Customer Survey Score.

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The ideal spot is moving constantly across the map, while products only move when an R&D project finishes. Products play “leap frog” with the ideal spot.

Excellent Product within 0.5 of ideal spot Satisfactory Product within 1.0 of ideal spot Poor Product within 1.5 of ideal spot Trouble Product beyond 1.5 of ideal spot

Segment Importance Ideal Positioning Traditional 21% Ideal spot in center of segment. Low End 16% Ideal spot trails the center of the segment. High End 43% Ideal spot leads the center of the segment. Performance 29% Ideal spot leads the center of the segment. Size 43% Ideal spot leads the center of the segment.

Age Age refers the customer’s perceived age of the design. When a product is repositioned in an R&D project, on the day of completion its age is cut in half. It becomes “the new improved” product, which is not as old as the previous model, but not brand new either.

Product’s age throughout the year, becoming a little older each month.

Excellent Product within 0.5 of ideal age Satisfactory Product within 1.0 of ideal age Poor Product within 1.5 of ideal age Trouble Product beyond 1.5 of ideal age

Segment Importance Ideal Age Traditional 47% 2.0 Years Low End 24% 7.0 Years High End 29% 0.0 Years Performance 9% 1.0 Years Size 29% 1.5 Years

Reliability Reliability refers the customer’s expectations for MTBF (Mean Time Before Failure) specification. This does not change over time.

Excellent MTBF within 1000 hours of the top of the range Satisfactory MTBF within 2500 hours of the top of the range Poor MTBF within 4000 hours of the top of the range Trouble MTBF below 4000 hours of the top of the range

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Segment Importance MTBF Range Traditional 9% 14000 – 19000 hours Low End 7% 12000 – 17000 hours High End 19% 20000 – 25000 hours Performance 45% 22000 – 27000 hours Size 19% 16000 – 21000 hours

Price Percentile The Price Percentile is defined as (Price – Low End of Expected Price Range)/(High End – Low End). For example, if the expected price range is $30-$40, a $32 is at the 20th percentile.

The Expected Price Range declines by $0.50 each year. For example, if the expected price range was $20-$30 last year, it will be $19.50 to $29.50 this year.

Excellent Below the 50th percentile Satisfactory Below the 75th percentile Poor Below the 90th percentile Trouble Above the 90th percentile

Segment Importance Expected Price Range Round 0 Traditional 23% $20 – $30 Low End 53% $15 – $25 High End 9% $30 – $40 Performance 19% $25 – $35 Size 9% $25 – $35

To be candid, this particular item in the rubric is difficult to defend. For example, in the High End, it makes little sense to price below the 50th percentile. Further, competitive rivalry is certainly a factor in pricing, yet what is “Excellent” in one situation could be “Poor” in another.

Yet we must say something about pricing. In the end we decided to use the customer’s perspective. A customer would say that any price below the 50th percentile in the range is an excellent price.

Awareness (See also Overall Awareness.) Economists speak of “perfect information”. In Capstone® 100% awareness means that your product loses none of its attractiveness because some potential customers are not aware of the product. Awareness answers two questions, “How many potential customers know about the product before they make a purchase decision? How difficult is it for them to discover the product offer?” If awareness is 75%, then 75% know about your product beforehand, and 25% have to work to discover it.

Attractiveness is expressed in the Customer Survey score. Products are evaluated on a scale of 0 to 100 on the four buying criteria – price, positioning, age, and reliability. A perfect product scores 100. If

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awareness is 100%, a product keeps all 100 points. But as awareness falls, so does the product score. At 0% awareness, the perfect product is down to 50 points.

Excellent Awareness > 90% Satisfactory Awareness > 75% Poor Awareness > 50% Trouble Awareness <= 50%

Accessibility (See also Overall Accessibility.) Accessibility addresses the question, “How easy is it for customers to work with the company during and after the sale?” Accessibility translates into sales people, distribution centers, customer service departments, etc. If accessibility is 75%, then 75% of customers find it easy to work with the company, and 25% have problems ranging from getting through to a salesman to taking delivery.

Capstone® requires two products in a segment to reach 100% accessibility. With a single product, companies can reach 75% accessibility. This constraint is relaxed if the Advanced Marketing module is switched on, in which case teams are given direct access to their distribution channel budgets.

Like Awareness, Accessibility affects the Customer Survey score. Products are evaluated on a scale of 0 to 100 on the four buying criteria – price, positioning, age, and reliability. A perfect product scores 100. If accessibility is 100%, the product keeps all 100 points. But as accessibility falls, so does the product score. At 0% accessibility, the product score is down to 50 points. At 75% accessibility, an otherwise perfect product would score 87.5.

Excellent Accessibility > 75% Satisfactory Accessibility > 60% Poor Accessibility > 50% Trouble Accessibility <= 50%

Customer Survey Score In any month, a product’s demand is driven by its monthly customer survey score. Assuming it does not run out of inventory, a product with a higher score will outsell a product with a lower score.

A customer survey score reflects how well a product meets its segment’s buying criteria. Company promotion, sales and accounts receivable policies also affect the survey score.

Scores are calculated once each month because a product’s age and positioning change a little each month. If during the year a product is revised by Research and Development, the product’s age, positioning and MTBF characteristics can change quite a bit. As a result, it is possible for a product with a very good December customer survey score to have had a much poorer score – and therefore poorer sales – in the months prior to an R&D revision.

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The Rubric exams the December Customer Survey score. Scores are on a scale of 0 to 100, but scores above 60 are rare.

Excellent December Customer Survey Score > 45 Satisfactory December Customer Survey Score > 30 Poor December Customer Survey Score > 15 Trouble December Customer Survey Score <= 15

Potential Share/Average Share This ratio offers insight into how well the product is doing relative to an average product. The potential share is what the product would have sold had there been sufficient inventory in every month.

Average share is 1/Teams. If there are 6 teams, average share would be 16.67%.

For example, if product Able’s potential share was 20%, then the ratio would be 20%/16.67% = 1.2.

Observe that the fewer the products in a segment, the higher the potential. We are not using the number of products to compute an average share, but the number of competitors in the industry. All teams had one product in the segment at the beginning of the simulation. We are also interested in the rivalry in the segment, and where the team has chosen to compete.

For example, if only 3 products are left in the segment, and our product had a 40% share, the ratio would yield 40%/16.67% = 2.4. But if there are now 10 products in the segment, and our share is 12%, the ratio would yield 12%/16.67% = 0.72.

Therefore, we are asking the related questions, “Did you choose a good place to compete?”, and “Were you successful in either driving competitors out or in keeping them from entering?”

Excellent Potential/Average Share > 1.5 Satisfactory Potential/Average Share > 1.0 Poor Potential/Average Share > 0.5 Trouble Potential/Average Share < 0.5

Actual Share/Potential Share This ratio examines the question, “Did the product meet the demand it generated?” It ignores those situations where the product picked up undeserved demand from a competitor’s stock out.

Excellent Actual/Potential share > 0.999 Satisfactory Actual/Potential share > 0.949 Poor Actual/Potential share > 0.899 Trouble Actual/Potential share <=0.899

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Plant Utilization See also Overall Plant Utilization. As discussed some second shift production is desirable.

Excellent Plant Utilization > 150% Satisfactory Plant Utilization > 100% Poor Plant Utilization > 90% Trouble Plant Utilization <=90%

Automation Potential automation levels in a segment are affected by R&D cycle times. On the one hand, a team wants all the automation they can get. On the other, the higher the automation level, the more difficult it becomes to reposition a product in a 12 month time-frame. For example, in the fastest moving High End segment, it is highly desirable to reposition a product every year. At an automation level of 6.5 to 7.0, this becomes difficult. R&D cycle times are further constrained by the number of projects underway – the more projects, the longer each project takes. Therefore, a differentiator with a broad product line cannot automate as highly as a niche differentiator with a narrower product line.

In the table below, automation levels are listed by segment in the order of Traditional, Low End, High End, Performance and Size.

Excellent Automation > (8,9,6,7,7) Satisfactory Automation > (6,7,5,6,6) Poor Automation > (5,6,4,5,5) Trouble Automation < (5,6,4,5,5)

Contribution Margin Contribution margin is defined as: (Price – Unit Cost)/Price.

It is the percentage of the price left over after paying for the inventory. The remainder can then be applied towards fixed costs. As a practical matter it is difficult to make a profit in Capstone® if the contribution margin is less than 30%.

Excellent Contribution Margin > 36% Satisfactory Contribution Margin > 30% Poor Contribution Margin > 25% Trouble Contribution Margin <= 25%

Days of Inventory Days of Inventory addresses the question, “Given our rate of annual sales, how many more days would it take to sell our inventory?”

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Excellent 1 <= Days of Inventory <=45 Satisfactory 45 < Days of Inventory <=90 Poor 90 < Days of Inventory <= 120 Trouble 120 < Days of Inventory OR 0 (stocked out)

Promotion Budget The promotion budget is subject to diminishing returns. Beyond $2 million per year little additional gain is seen in awareness, and by $3 million any gain has disappeared. On the other hand, we would like to see a product reach 100% awareness eventually. If it does reach 100%, the company can maintain its awareness for $1.4 million each year.

Excellent $1.4M < Promo Budget <=$2.0M Satisfactory $1.0..$1.4M, or $2.0..$2.5M Poor $0.7..$1.0M, or $2.5..$3.0M Trouble <$0.7M, or >$3.0M

Sales Budget The Sales Budget is subject to diminishing returns. Beyond $3.0M the product contributes no additional gain in accessibility.

Excellent $2.2M < Sales Budget <=$3.0M Satisfactory $1.5M < Sales Budget <=$2.2M Poor $0.7M < Sales Budget <= $1.5M Trouble Sales Budget < $0.7M

R&D Utilization We would like to see the R&D department work as hard as possible. If a project ends before December, we are wasting months of potential R&D time. If a company discovers that they can reposition a product perfectly in less than 12 months, it should add additional automation to both reduce labor costs and improve R&D utilization.

Excellent Project ends in December Satisfactory Project ends in November Poor Project ends in October Trouble Project ends before October

Overall Product Evaluation How did the team do on each element across the product line? We sum the row and divide by the product count. For example, if a team has 4 products and their positioning scores are (3,2,3,2), the formula will yield 10/4 = 2.5 which will round to 3.

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Summary Rubrics

Using the Courier Excellent – 3 points Satisfactory –

2 points Poor – 1

point Trouble – 0


1 Pg 1. ROS >8% 4%..8% 0%..4% < 0% 2 Pg 1. Turnover >1.3 1.0..1.3 0.8..1.0 < 0.8

3 Pg 1. Leverage 1.8 – 2.5 1.6-1.8, 2.5-2.8

1.4-1.6,2.8 – 3.2 <1.4, >3.2

4 Pg 1. Emergency Loan $0 $0 – $1M $1M .. $8M >$8M 5 Pg 1. Contrib. Margin >35% 27% .. 35% 22% .. 27% <22%


Pg 1. Market Share (depends on # teams) >1.5 times

average share

0.9 – 1.5 times average


0.6 – 0.9 times

average share

< 0.6 times average share

7 Pg 2. Stock Price (round # =

1..8) >$40 +

5*Round # >$25 +

5*Round # >$10 +

5*Round # <$10 +

5*Round #

8 Pg 2. Stock Price Change

>$20 >$7 >-$5 <-$5

9 Pg 2. EPS (round # = 1..8) >$2 + Round

# >(2 +

round#)/3 $0..(2+Roun

d#)/3 < $0

10 Pg 2. Bond Rating AAA, AA, A BBB, BB, B CCC, CC, C DDD


Pg 3. Inventory fluctuation reserves 75..105 days 55..75, or 105..135 days

30..55, or 135..160


<30 or >160 days


Pg 3. Plant Improvement $12M to $24M investment

$6..12M or $24..30M


$0..$6M or $31..$36M investment

<$0M or >$36M investment


Pg. 3. Plant purchases funded. StockIssues+BondIssues+Depre ciation+Excess Working Capital

– Plant Improvement

Fully funded. Funding-Plant Improvement>


Funded within $4M.

Funding-Plant Improvement

> -$4M

Funded within $8M.

Funding- Plant

Improvemen t > -$8M

Not funded within $8M


Pg 3. Sales to Current Assets (Note. Typically AR policy is 30

days and inventory 90 days. Ratio between

3.5 and 4.5

Ratio is 3.0..3.5 or


Ratio 2.5..3.0 or


Ratio <2.5 or >5.5


Pg 3. Current Ratio (Current Assets over Current Liabilities) Ratio between

1.8 and 2.2 Ratio 1.6..1.8

or 2.2..2.4 1.3..1.6 or

2.4..2.7 <1.3 or >2.7

16 Pg. 3 Total Assets >($84M+20*R

ound#) >($84M+16*R

ound#) >($84M+12*

Round#) <($84M+12*Ro



Pg. 4. Overall Plant Utilization (Total Production/Total Capacity)

>1.7 >1.3 >0.9 <0.9


Pg.4 Automation Spread All Product Automation with 2.0 of each other

All Product Automation with 3.0 of each other

>All Product Automation within 4.0 of each other

Automation spread>4

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19 Pg 4. Product count >7 products >=4 products <4 products <4 products 20 Pg 4. Stock outs None 1 stockout 2 stockouts 3 or more


Pg. 4 Products with Big Inventories. (More than > 4

months of sales.) None <=2 products <=4 products 5+ products

22 A/R credit terms 45-60 days 30-45 or 60-75 days

20-30 or 75- 90 days

<20 days or >90 days

23 A/P credit terms 0-15 days 15-30 days 30-45 days >45 days


Pg 10 Overall Actual versus Potential Demand Met Demand

Met 98% of potential demand

Met 96% of potential demand

Met < 96% of potential demand

25 Average Unit Cost <$18-round#/4 <$20-round#/4

<$22- round#/4 >$22-Round#/4

Product Rubric

Excellent – 3 points

Satisfactory – 2 points

Poor – 1 point

Trouble – 0 point

1 Positioning Within 0.5 of Ideal Spot Within 1.0 Within 1.5 Beyond 1.5

2 Age Within 0.5 of

ideal age Within 1.0 Within 1.5 Beyond 1.5

3 Reliability

Within 1000 of top of range Within 2500 Within 4000

Below 4000 from top of


4 Price Percentile <50% of the

range <75% of the

range <90% of the

range >90% of the

range 5 Awareness >90% >75% >50% <=50% 6 Accessibility >75% >60% >50% <=50% 7 Customer Survey Score >45 >30 >15 <15

8 Potential Share/Avg

>1.5*average share

>Average share

>0.5 * average


<0.5 * average share

9 Actual Share/Potential >0.999 >0.949 >0.899 Unit

Sales<=.899 10 Plant Utilization >=150% >=100% >=90% <90%

11 Automation >=(8,9,6,7,7) >=(6,7,5,6,6) >=(5,6,4,5,5

) <(5,6,4,5,5)

12 Contribution Margin >=36% >=30% >=25% <25%

13 Days of Inventory 1..45 days 45..90 days 90..120

days >120 days or

stock out

14 Promotion Budget $1.4M..2.0M 1.0M..1.4M, 2.0M..2.5M

0.7M..1.0M, 2.5M..3M.. <0.7M or >3.0M

15 Sales Budget $2.2M..3.0M 1.5M..2.2M 0.7M..1.5M <0.7M or >3.0M

16 R&D Utilization Project ends in December

Project ends in November

Project ends in October

Project ends before October

  • How to Use This Report
  • Sample Report
  • The Company Rubric
    • ROS
    • EPS (Earnings Per Share)
    • Contribution Margin
    • Change in Stock Price
    • Leverage
    • Stock Price
    • Bond Rating
    • Emergency Loans
    • Current Ratio
    • Inventory Reserves
    • Plant Purchases Funded
    • Accounts Receivable
    • Accounts Payable
    • Asset Turnover
    • Sales to Current Assets
    • Overall Plant Utilization
    • Stock Outs (Company level)
    • Bloated Inventories
    • Overall Actual vs. Potential Demand
    • Cost Leadership
    • Product Breadth
    • Market Share Overall
    • Overall Awareness
    • Overall Accessibility
    • Overall Design
    • Asset Base
  • The Product Rubric
    • Positioning
    • Age
    • Reliability
    • Price Percentile
    • Awareness
    • Accessibility
    • Customer Survey Score
    • Potential Share/Average Share
    • Actual Share/Potential Share
    • Plant Utilization
    • Automation
    • Contribution Margin
    • Days of Inventory
    • Promotion Budget
    • Sales Budget
    • R&D Utilization
    • Overall Product Evaluation
  • Summary Rubrics